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The health care costs budget fallacy
Today's report is this:
The financial outlook for Medicare and Social Security has significantly worsened, as the bad economy and mounting job losses have pushed both programs years closer to insolvency, according to a grim report issued Tuesday by the Obama administration.
Maybe you once argued that "Social Security is fine," but dollars are fungible and the budget must be judged as a whole. The consumption tax is coming, I am sorry to say.
I'm seeing nascent signs of a new (but actually old) fallacy, namely that since health care costs can (will?) crush the budget, we don't have to worry so much about other expenditures. The mental story runs something like this: "if we don't cure health care cost inflation, it doesn't matter; if we do cure health care cost inflation, we can afford it." That's exactly the kind of false mental framing that behavioral economics identifies as irrational in other settings.
Here is some stupid TV.
Elsewhere, Richard Posner makes many concessions. I do not disagree; it's a mistake to think that a political movement can be very smart, especially after extended years in power.
Posted by Tyler Cowen on May 12, 2009 at 05:19 PM in Economics | Permalink
Comments
I just noticed you use two spaces after each paragraph. you should stop. it's unnecessary and looks bad. you're not using a typewriter here.
Posted by: Ian at May 12, 2009 5:31:53 PM
"if we don't cure health care cost inflation, it doesn't matter; if we do cure health care cost inflation, we can afford it."
You leave out the conservative canard that always precedes this: "Medicare and Social Security must be cut or they are going to bankrupt the country." It's the standard conservative line on why we need entitlement reform and it (unfortunately) frames the debate.
Posted by: MostlyAPragmatist at May 12, 2009 5:44:46 PM
Ian, I think you meant sentences, not paragraphs. And if you did, I disagree with you. What's wrong with two spaces? It looks better than just having one in my eyes.
Posted by: Curt Fischer at May 12, 2009 5:47:19 PM
The argument I usually see is that the Medicare problem is really a healthcare problem and that if we fix healthcare Medicare will be fine, while if we don't fix healthcare we have a major mess.
A consumption tax is particularly unfair to savers who had their income taxed, but had hoped to spend their savings. Consumption tax is a double whammy.
Posted by: fusion at May 12, 2009 5:56:37 PM
How is a consumption tax NOT the final nail in the coffin of consumer demand? It seems to me that taxing consumption is a disincentive to consume, ergo, more demand destruction. As a baby boomer who has actually saved a lot of after-tax dollars, I see double taxation here, plus a major changing of the rules. It was risky enough to max out my 401k and IRA, because the tax rate at retirement would be uncertain, but now a proposal to tax consumption (all my outgo will be consumption, with no income) will really force me and other retirees to cut back substantially. Wouldn't that really be a negative factor for GDP??
Posted by: Laocoon at May 12, 2009 5:59:31 PM
hard to figure out what you are talking about here.
the "secret" to Medicare... whatever we do about the cost... is that if we want the care we are going to have to pay for it.
the good news is that we can afford to pay for it. even the ugly Trustees Projection shows that Medicare will cost 12% of a payroll that will be 230% of today's. Maybe you'd rather spend your extra money on two trips to vegas every year. But isn't it a little stupid to say "the costs of medical care are going up. better cancel my insurance."
the trouble i think i see here is that you have all been to school, so you can't think anymore without some magic formula from college classes getting in your way.
Posted by: coberly at May 12, 2009 6:16:39 PM
The mental story runs something like this: "if we don't cure health care cost inflation, it doesn't matter; if we do cure health care cost inflation, we can afford it." That's exactly the kind of false mental framing that behavioral economics identifies as irrational in other settings.
To me this is just priorities. You focus on the thing that will crush the budget. Is the irrationality that by focusing only on health care we are not considering a composite reform of Medicare and Social Security?
Posted by: mk at May 12, 2009 6:25:47 PM
Richard Posner's comments remind me of a strange suspicion I've had lately that the once-powerful framing tools of the intellectual right (as I recall from George Lakoff) is now being flailed about by people that don't know how to use them anymore. Michele Bachmann's swine flu comments are like observing a cargo cultist dumbly attempting to mime the subtle and simple methods that worked so well in the 80s and 90s; the form remembered but the function lost.
I also love the paragraph spacing comment. Not exactly an argument from authority.
Posted by: Bryan at May 12, 2009 6:35:47 PM
I read a great paper a last year about the innefencies of the healthcare industry. According to the paper, about 60% of healthcare costs are administrative costs (the people at the front desk, managment). The point of this paper, was that if we shift the healthcare industry into one giant building (say a Costco or a Sam's Club of healthcare) the price of healthcare would drop considerably, the paper suggested up to a 30% drop in healthcare prices.
If anyone has ever gotten sick, they know the extreme hassle of going to 15 different testing centers and doctor's offices, imagine if all of those doctor's offices and testing centers were in one place, also, the phamarcist could be in that building as well, instead of in the grocery store. It would sure cut down on rent costs and administrative costs.
I think this would be a more practical and innefecient solution than to simply fund an inneffecient industry.
Posted by: torris187 at May 12, 2009 6:40:45 PM
I think claiming it's health or nothing isn't productive but I think it is fair to say that compared to health other spending is far less of a problem and considering that controlling spending requires political will, certainly a scarce resource, it should be allocated toward where it will do the most good, controlling medical costs.
I think the other elephant in the room is that defense and weapons programs are a similarly significant source of spending and even more out of line with what other nations spend.
Finally I think viewing medical expenses as a portion of federal spending as opposed to medical spending as total spending isn't terribly productive. People are going to need/want medical care and it isn't terribly important where it comes from. It the state were somehow able to provide the same level of care for the same price (which isn't all that crazy) it wouldn't represent a new cost.
Posted by: Michael Foody at May 12, 2009 6:49:40 PM
Tyler uses extra spaces to starve the beast.
Posted by: Andrew at May 12, 2009 6:55:26 PM
I'm puzzled by the assertion that this is a framing error. It seems like the opposite.
As an individual, if your monthly budget is being blown by $1000, it doesn't make a lot of sense to worry about saving nickels. But if you can figure out how to save the $1000 then you don't need to worry about the cost of the occasional pack of gum.
Posted by: FosterBoondoggle at May 12, 2009 7:03:59 PM
As for Posner, the trouble with Yglesias' piece (and it's a trope that's bound to be repeated elsewhere on the left) is the claim that Posner is "definitely a political conservative."
Posner may have been a Reagan appointee, but you can't go by that (Eisenhower, after all, appointed Warren and Brennan). Posner may have been affiliated with the market-friendly wing of the law and economics movement, but you can't go by that either.
The bottom line is that Posner is not now and never has been a conservative in any meaningful sense of the term. I addressed this issue a long time ago, concluding that Posner's documented record puts him in opposition to virtually every major conservative principle.
Posted by: Steve Bainbridge at May 12, 2009 7:06:04 PM
If the goal is to balance the budget, political capital is best spent on reforms that net the largest savings. However if a proposal is politically impossible, then chosing to debate it is worse than spending the time on a small but successful reform resulting in even $1 of net savings. This is my current problem with republicans- ideological rants against major policies are predictably rejected by the current administration, the time would be better spent fighting for achievable amendments and reforms that reduce spending (particularly while public sentiment has shifted against your brand and you are not winning minds by making those ideological arguments).
Re healthcare, as a techie every encounter with medical scheduling, paperwork, and billing gives me pains- I know a universal patient-centered health portal is so technologically feasible, but each time I'm reminded again how economically and politically infeasible it seems to individual providers, insurers, and government agencies. Doctors continue to play God by using the AMA-guild to restrict licensing/education and lobby for government regulation of prescription drugs, privacy standards, and malpractice laws, while enjoying kickbacks from pharma salesmen and competing with insurance companies in a ridiculous billing game that effectively excludes patients from cost control (pharmacists have been outright rude when I ask for a price quote on prescriptions- is it wrong to weigh cost/benefit of proactively filling pain drug prescriptions I probably won't need?).
Out of anyone, economists should understand that efficiency gains are not zero-sum, that due to inelastic demand for healthcare most efficiency gains accrue to patients not doctors yet doctors hold a large informational advantage they routinely exploit to scare patients away from lower-cost providers, and that there's a coordination impediment to reaping IT efficiency gains when the value of a doctor's IT investment depends on it's adoption as a standard by suppliers, competitors, customers, and third-party-payers. Prudent doctors stick with inefficient paper-based systems, waiting for others to replace the standardized paper-based processes with a standardized interface acceptable to their network of insurers, pharmacies, and patients (who are also waiting for a stable IT standard to emerge- no insurer wants to maintain customized interfaces for each affiliated doctor, no patient wants to navigate a new website for each specialist- or even remember a new password!).
Posted by: ami at May 12, 2009 8:12:23 PM
"Maybe you once argued that "Social Security is fine," but dollars are fungible and the budget must be judged as a whole." And if you don't mention Defense, Drug wars, bail outs and border "protection" when you discuss those fungible dollars, then this sounds like just one more attack on Social Security, about the only social program the US has done right in the last seventy-four years.
Doesn't a VAT assume that some value is being added somewhere? Or is it enough to just make it up?
Posted by: carping demon at May 12, 2009 8:32:44 PM
We have to fix health care soon or it will blow up. We should make some changes to Social Security, but that is less urgent and less important. Yet there are many people (include some who fashion themselves as the serious, responsible types) who pretend that Social Security is the one facing a crisis, and who clamor for Social Security reform rather than health care reform. I think that much of the "Social Security is fine" defense has been about getting our priorities straight, and that once health care reform is happening many of the people who made that argument will be open to Social Security reform.
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Posted by: runescape gold at May 12, 2009 9:11:20 PM
This idea of "insolvency" is only assuming the ruling party CHOOSES not to make good on its promises right? I mean its not like it can just run out of money...
But is choosing not to pay your bills really a good definition of insolvency?
Posted by: Michael at May 12, 2009 9:22:13 PM
"dollars are fungible"
the motto of embezzlers everywhere.
Posted by: coberly at May 12, 2009 9:53:30 PM
But remember Bush wanted to dump SS funds into 401K type accounts in 2005 (about); that would have been a worse disaster.
SS is as solvent as the USA is viable and if the USA is not viable, getting SS checks is least of people's worries; the USA can just cut other spending, raise some taxes, and borrow to cover the demographic misalignment. Chillax.
TMD
Posted by: The Masked Defender at May 12, 2009 10:07:01 PM
Oh come on Tyler. Really stupid TV is this:
http://www.youtube.com/watch?v=2ndx_IdlUQU
Posted by: James at May 12, 2009 11:47:50 PM
"I think the other elephant in the room is that defense and weapons programs are a similarly significant source of spending and even more out of line with what other nations spend."
Not really once you adjust for purchasing power. If you assume the Pentagon and defense analysts are correct about China's spending actually being well over $100 billion annually at this point, in another five years or so at their current rate of increase they'll be spending vastly more than anyone else on the planet and jostling with U.S. expenditure levels. It's not unreasonable to believe their spending growth rate may even increase given that they have yet to even get to the large scale production of new weapons platforms or the production of a true blue water navy. While it's fine to argue that the U.S. and China would never go to war, that doesn't seem to be the argument China is tacitly making with its expenditures.
Otherwise, I'm a little at a loss to explain the bashing of conservative intellectualism, or claimed lack of such. If we're talking about the candidates foisted upon us, sure, I'll give you that the Democrats have (largely on the shoulders of Obama) outstripped the Republicans. If we're talking about congresscritters, I see no difference in the level of stupidity, just in the forms of it. If we're talking about the constituency, I'm confused as hell. Idiocy is rampant in both parties, whether it's conservatives who fight against the teaching of evolution or liberals who can't be bothered to pay enough attention to know Obama has the same views on gay marriage as people they're bashing or to know that Bush never "banned stem cell research." Stupid is stupid, I don't find one more comforting than the other simply because right now we have an administration that's making a little more sense on some things than the previous one. That won't always hold. Pretending one side has cornered the market on intellectualism is frightening.
Posted by: PM at May 13, 2009 1:54:24 AM
Fixing Social Security to close its coming financing gap of 2 points of GDP -- a *big* amount by all historical budget measures -- is very doable. All the options have been analyzed to death, all that is needed is the will to actually adopt one of them or some mix of them.
But to most left-side partisans this is anathema -- so they've adopted the line that "rising health care costs are what's going to crush the ecomomy, so leave Social Security alone when its cost matters so little."
Alas, rising health care costs aren't what's going to crush the economy. They dominate in the long run projections, 50 to 75 years out, but the short run of 20 to 30 years is what's going to kill these programs as they are, making all 75-year projections moot (absurdly so!).
Because it is by 2030 that income taxes will have to rise by >50% (or some equivalent like a VAT will have to be adopted) to pay for these programs -- which ain't going to happen without major program re-writes to cut their cost.
And in the 21 years to 2030, it is not the rising cost of health care but the rising number of retirees -- i.e., Social Security and health care at today's price -- that will drive that 50% tax increase.
To paraphrase Butch to Sundance, it doesn't matter if we can't swim to the 2080s, the fall to 2030 is what's going to kill us.
Posted by: Jim Glass at May 13, 2009 2:27:39 AM
The reason health care is the key to solving the problems facing the US is simple: either facts and reason provide the foundation for the solution, or ideology and irrational rejections of the facts continues to be the only allowed option.
The solution is simple: universal health insurance. The specific design and implementation isn't simple, nor easy, but the solution is proven to deliver better health care outcomes for less money.
The irony to me is that my exposure to economics at the beginning was reading Friedman and Schwartz Monetary History of the US - a study in data and from there came the evidence for monetary policy. But I can't see any evidence of actual research into real economies by economists who spout their theories.
I've read many economists claim that the reason health care is so expensive is because of government involvement, that its because third parties are paying for it, that whatever. That is then coupled with the claims that the health care in other nations is so terrible, one gets the idea they are dying decades younger than we do.
Clearly the predominantly conservative economists refuse to look at the facts and the facts are as clear as the data that Friedman used to convince himself and many others that monetary theory is rooted in the real world.
If you look at any of the OECD nations, they all clearly get more health care for the dollar than the US by a long shot. You can't refute the evidence, and as a result, not one has attempted to refute the evidence.
Instead, the strategy has relied totally on failed ideology, claiming that the problem is that the ideology hasn't been fully adopted.
Coupled with attacks on the straw man "socialized medicine."
Condemn the Canadian health care system, but just be sure to note that, first, everyone is covered, second, the tax payer cost is no higher than the tax payer cost in the US, third, the private funding is a quarter of the private cost in the US, fourth, Canadians live two years longer on average, fifth, everyone is covered by insurance.
Or to put it another way, if you are not rich enough or poor enough, you will wait much longer in the US than you will in Canada, you are very likely to die much earlier than in Canada because you had to wait so much longer, and as your health deteriorates toward death, the US health care system will spend far more money in the last month of your life trying to keep you from dying than the Canadians would have spent on you your entire life. And as you can't afford that care, its costs will be added to taxes and insurance and treatment bills for everyone else.
The nation with a heath care system that best describes the only rational step for the US is Switzerland. They made that step about 15 years ago when the level of uninsured reached crisis levels, approaching 10% - the US heading to 20%.
They have a combination of public plan, like the US already has with Medicare, they have employer payment for the employee choice of plan, individuals buying from a list of insurance policies, and so on. And the insurers have agreed on schedules of prices just like the insurers and the government does, as well as approved treatments, just like US insurers and the government does. The one thing they changed was to require that everyone buy insurance and they made sure that everyone could afford it with subsidizes. The result is they have seen their costs go up far less than in the US and everyone is covered. When the plan was proposed and it went to a national referendum, it barely passed, but today no one would repeal it and return to the old way.
So, we have an example of a nation that went through the most logical change for the US.
Further, Mitt Romney determined to solve the problem as governor of Mass. He studied it and worked with the legislature and ended up with essentially the same solution as the Swiss did a decade earlier. And the implementation in Mass is working. Yep, there are problems, but no state is without problems with their health care system.
The only hope is to do what the Swiss did and Romney did. If the US can't take the obvious step in health care, then it is impossible to expect the US to take any steps on any of the other problems the nation faces where the basic solution is far less clear.
Posted by: mulp at May 13, 2009 2:54:44 AM
Back in the late 19th century, the federal government spent little on arms, social security, or medicare.
Today, we feel a need to spend a lot and that leads to taxing a lot more. There is no particular reason why that process should stop. Why else would we aspire to increase GDP except to spend it on stuff.
I for one am glad to pay more taxes on my growing income to pay for better and more expensive health care. Obviously we would all like it to be more efficient and all. But mostly we want cures, even if they are expensive.
NOTE: It is generally accepted that the proper typographic usage is to put a single space after a period. This is to even out the white space between each word. The period itself is visually much less dark than a regular character and by putting a period and a single space there is sufficient white space between sentences. With two spaces there is too much space.
Posted by: Robb Lutton at May 13, 2009 7:23:34 AM
