Health Care Cost Savings The Laffer Curve of the Left
There’s a headline that’s sure to upset both sides of the aisle! But so says Megan McArdle, noting that while the Laffer Curve had some validity at one point, it was used far past that point to push for things the right wanted, like tax cuts. Now, a similar dynamic is rising among the left, who use nebelous health care ‘savings’ to push for their desired agenda:
Several days ago, Tyler Cowen triggered some righteous rage for suggesting that the administration’s promises to cut health care costs “runs the risk of becoming the new voodoo economics”. He was expressing a growing frustration among reputable conservative economists that the promises of health care cost control have turned into the Laffer Curve of the left: a way to pretend that their favored policies don’t have any costs.
It is true that some countries have controlled costs, and therefore made it easier to afford coverage for more people. It is also true that some countries have cut marginal tax rates, and thereby actually raised the tax revenue they collected. For all the derision about the Laffer Curve, it is absolutely correct–indeed, it has to be; it’s basically just an identity. Tax revenues peak somewhere. If you’re to the right of that peak, you could raise revenue by lowering rates.
What’s left is the empirical question: are we to the right of that peak?
…And what about health care costs? Is it reasonable to believe that we are going to control them? After all, other countries have.
I’d say we have substantial empirical evidence that we are not going to control the health care cost inflation which is busting Medicare’s budget, much less the new costs the administration is planning to add. We have been trying to control health care costs since the 1970s made it clear that Medicare was going to get really, really expensive. And any idea that you care to name, from comparative effectiveness research to healthcare IT to preventive medicine . . . these have all been on the table for more than thirty years, under one name or another. They haven’t happened.
The answer that those promising magical cost reductions need to ask is “Why haven’t they happened?” and “What has changed to make them feasible now?” But when I ask this question, I get angry demands that I put forward my plan for cost control, rather than merely critiquing everyone else’s. This seems rather like demanding that I put forward my design for a perpetual motion machine before I am allowed to point out problems in the US energy market.
That’s good stuff – wish I were that clever! Robert Samuelson draws a clever analogy of his own. The United States is like General Motors 25 years ago: staring down an abyss of obligations it cannot meet, and choosing to increase them, rather than pare back to what we can afford:
In theory, expanding public welfare could offset eroding private welfare. President Obama’s health care proposal reflects that logic. The trouble is that the public sector also faces enormous cost pressures, driven by an aging population and rising health costs. The Congressional Budget Office projects the federal debt to double as a share of the economy (gross domestic product) to 82 percent of GDP by 2019.
Any sober examination of figures like these suggests that the system has promised more than it can realistically deliver. We are borrowing not to finance investment in the future but to pay for today’s welfare — present consumption. Sooner or later, the huge debt will weaken the economy. Nor would paying for all promised benefits with higher taxes be desirable. Big increases in either debt or taxes risk depressing economic growth, making it harder yet to pay promised benefits.
The U.S. welfare state is weakening; insecurity is rising. The sensible thing would be to decide which forms of public welfare are needed to protect the vulnerable and to begin paring others. Our inaction poses another dreary parallel with GM. It was obvious a quarter-century ago that GM the auto company could not support GM the welfare state. But the union wouldn’t surrender benefits, and the company acquiesced. Inertia prevailed, and the reckoning came. The same cycle, repeated on a national scale with sums many multiples higher, would be correspondingly more fearsome.
UPDATE 9:52 p.m.: But don’t worry about those costs – we can afford them. How do I know? Paul Krugman says so! How does he know? Oh, he just knows – don’t worry about those little details – trust him, he’s an economist!
I’m not that worried about the issue of costs. Yes, the Congressional Budget Office’s preliminary cost estimates for Senate plans were higher than expected, and caused considerable consternation last week. But the fundamental fact is that we can afford universal health insurance — even those high estimates were less than the $1.8 trillion cost of the Bush tax cuts. Furthermore, Democratic leaders know that they have to pass a health care bill for the sake of their own survival. One way or another, the numbers will be brought in line.
Yeesh…you know, there was a time Krugman actually bothered to make arguments, rather than just assertions…guess a Nobel-Prize winner doesn’t have to marshall any boring things like facts anymore…this is starting to become a (quite hilarious) trend…
1) McArdle’s assertion that the Laffer Curve is “an identity” makes my mathematician’s brain want to explode. I found it hard to take anything else she said seriously after that clear indication that she didn’t know at all what she was talking about.
2) It may be that Krugman doesn’t directly make the argument that we can afford universal health care, but his point about the double standard still stands. If Obama were trying to push through a war or a tax cut bill with the same price tag, he wouldn’t face nearly the same opposition on the basis of cost. Why that double standard?
I still want to know what I get for all this extra federal cost and debt. Better care? Lower individual cost? Both?
They really do think the money belongs to the government.
The government provides services, Bob. Without commensurate cuts to those services, I hate to break it to you, but tax cuts end up being a net cost to the government.
But you seem like you’d be happier with a completely unfunded government. Good luck with that.
I notice no one has addressed the burning question that McCardle asks:
What has changed to make cost reductions feasible now? What is different now from the last 35 years of trying to control costs?
What she seemed to say is that nobody’s tried. If trying meant actually implementing the programs she talked about, instead of just talking about them. Rather, she seems to go the long way around to a fallacious argument and say that if they weren’t implemented, it’s necessarily because they weren’t feasible, and if they weren’t feasible then, they can’t possibly be feasible now. No step of that logical progression holds up under even the lightest scrutiny.
To quote McArdle:
The fundamental problem that McArdle is trying to point out is that the left wants universal health care, so it insists that ultimately, it will pay for itself. This is very similar to the right, the Laffer curve, and tax cuts. It’s not an implausible argument, is it?…
But let me ask a question of my own: what percentage of huge government programs have EVER paid for themselves, or achieved any significant savings? The more probable route (in fact, it nears 100% probability) is that the effort will become bloated, entrenched in waste, and grow structurally larger by the year…
I don’t hear people saying it’ll pay for itself, Mark. Only that there are cost-mitigating measures, including but not limited to comparative effectiveness, preventative care, an individual mandate, and a robust public option, that could, if employed properly, keep costs down. I believe that the theory here, though, is that we’re going to pay for health care reform through some combination of new taxes, including but not necessarily limited to a cap on the health care tax exemption. Nobody’s making the argument that it’ll be so good and efficient that we’ll make money off of it.
No, but as the Brooks article I quoted above says, it WAS supposed to be revenue neutral, through a combination of taxes and savings, not $1 to $1.6 trillion in the hole…
I haven’t done the full gamut of reading on it, but my understanding was that the plan scored by the CBO wasn’t complete.
http://www.huffingtonpost.com/2009/06/16/gop-pushed-for-incomplete_n_216206.html
This is no secret, despite Huff’n'Puff’s effort to tarnish those dirty Republicans. The letter to Kennedy stated that there were provisions that might be included but weren’t at this point, so the analysis was necessarily incomplete. However, it’s worth noting, if you read the CBO’s letter, that most of the missing provisions would INCREASE the cost of the plan…
Example from the letter:
Now you’re a smart guy, so I know that YOU know that expanding eligibility for Medicare and subsidizing more coverage ADD to the cost of the proposal. In other words, the fact that the proposal was incomplete worked to the Democrats’ favor – and it was still outrageously expensive…
Those are two provisions that are not in there. Another provision that was not in there was a public option, which is one of the price control mechanisms that’s been widely discussed.
Now you’re a smart guy, so I know that YOU know that the two things you cited above weren’t the only things that weren’t in the bill reviewed by the CBO.
Meanwhile in Massachusetts, site of the first in the nation mandatory state-provided and subsidized, public sector competitive health plan, eligibility is being trimmed and benefits are being reduced in response to declining state tax revenue:
http://www.boston.com/news/local/massachusetts/articles/2009/06/24/state_cuts_its_health_coverage_by_115m/
True, there were other missing provisions, but it’s a distortion to say the cost was high because the plan was incomplete…