More on the Medicare Doctor “Fix”

 On Sunday, I expressed concern about Congress enacting a permanent Medicare doctor “fix” without paying for it. Yesterday, the Washington Post chimed in with similar concerns.

I have now written a longer version of my argument, which has been published by e21, a new think thank based in New York and Washington. My bottom line remains the same:

Thus, even as Congress struggles to enact one roughly $900 billion health bill, it also wants to hustle through a second $245 billion one. Moreover, Congressional leaders want to pass the permanent doctor fix without paying for it. All $245 billion would thus flow straight into our deficits.

For a nation running trillion-dollar deficits, such profligacy should no longer be acceptable.

When I say that e21 is new, I mean really new. e21 (short for Economic Policies for the 21st Century) opened its doors (well, its web site) yesterday. It’s mission statement is:

 We aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.  Drawing on the expertise of practitioners, policymakers, and academics, we will encourage a spirited debate about the way forward for democratic capitalism.  And we will do so in a manner that is accessible and engaging, in a way that appeals to both experts and non-experts.

I hope to contribute additional pieces to e21 in the future.

Why You Should Oppose the Medicare Doctor “Fix”

The Senate is preparing to take up a bill to implement a permanent “fix” to the rates that Medicare pays for physicians. That bill is a budget-buster, costing almost $250 billion over the next ten years. But Congress doesn’t want to pay for it. Everyone concerned about our budget situation should oppose this latest example of Washington profligacy.

The Senate is preparing to take up a bill to implement a permanent “fix” to the rates that Medicare pays for physicians. That bill is expensive, costing almost $250 billion over the next ten years. But Congress doesn’t want to pay for it. Everyone concerned about our budget situation should oppose this latest example of Washington profligacy.

The underlying mechanics of the issue are arcane, but the fundamental political and budget issues are simple:

  • Under current law, the rates that Medicare pays physicians are scheduled to decline by more than 20% at the end of the year. No one, least of all the doctors, wants this to happen. So Congress is looking for a “fix”.
  • This problem is not new. It began in 1997, when Congress decided to limit the amount spent on physician services in Medicare. The idea was that spending above the target would be offset by reductions in physician payment rates in the future. However, Congress has repeatedly flinched from implementing those reductions. Moreover, Congress often decided to avoid near-term reductions by promising to cut payment rates even more in the future. That’s why there’s an accumulated “debt” requiring a 20+% cut in rates now.
  • With encouragement from the President, many Congressional leaders want to eliminate this issue once and for all by enacting a bill that would provide payment increases to doctors, rather than dramatic cuts, at a cost of $245 billion over the next ten years (and unmeasured amounts in the years beyond).
  • And here’s the kicker: they want to spend that money without paying for it. So all $245 billion would flow straight into our deficits. For a nation running trillion-dollar deficits, that’s unconscionable.

Proponents of this profligacy will argue that (a) it’s essential to fix physician payments once and for all and (b) doing so now is no different from the doctor fixes Congress has enacted in previous years.

Both of those arguments are wrong.

Continue reading “Why You Should Oppose the Medicare Doctor “Fix””

Manufacturing on the Upswing

Earlier today, the Federal Reserve released its latest data on industrial production. Bottom line: production over the past three months has been surprisingly strong. Growth in September was more than expected, and the previous month was revised upward.

Industrial production has now increased for three straight months, as has a slightly narrower measure, manufacturing production:

Manufacturing IP - September

As you can see, manufacturing production turned consistently negative in January of 2008 and then fell off a cliff toward the end of the year. After declining in 17 of 18 months (driving manufacturing production down a total of 17%), manufacturing production has now risen for three straight months (for a cumulative rebound of about 3%).

Manufacturing still has a long way to go. But the recent strength in industrial production, generally, and manufacturing, specifically, adds weight to the view that the recession may have ended early this summer. (Recall that the last recession ended in November 2001, even though job losses continued long afterward.)

The Social Security Windfall

As you have probably heard, Social Security recipients won’t be getting a cost-of-living adjustment (COLA) in 2010. Well, at least under current law.

The reason is simple: The annual COLA is based on a measure of consumer inflation from the third quarter of one year to the next. Last year, that measure was boosted by the run-up in energy prices, and Social Security recipients received a 5.8% increase in their monthly payments. That price shock has receded and, as a result, inflation from the third quarter of 2008 to the third quarter of 2009 was actually negative. According to today’s release of September consumer price data, the CPI-W (the inflation measure used to set the COLA) fell by 2.1% since the third quarter of last year.

If Social Security payments were exactly indexed to inflation, that would imply a negative COLA—a reduction in monthly benefits—of 2.1%. But the law doesn’t allow benefits to fall. So monthly benefits in 2010 will be the same as in 2009.

Some observers are portraying this as a hardship for seniors and are suggesting that they should get a special COLA this year. If you put on your green eyeshade for a moment, however, you will realize that the reverse is true. The fact that Social Security benefits will be flat means that seniors are receiving a windfall. Under the logic of cost of living adjustments, those benefits should have fallen by 2.1%. Instead they will be flat. Seniors will thus receive a 2.1% increase in their real Social Security benefits.

That’s why thoughtful budget analysts from across the political spectrum believe that a special COLA is not warranted. See, for example, this piece by Andrew Biggs at the American Enterprise Institute and this piece by Kathy Ruffing at the Center on Budget and Policy Priorities. (In case you aren’t familiar with them, Andrew and Kathy are two of the most knowledgeable people about Social Security on the planet.)

Kathy’s piece includes a nice discussion of alternative measures of cost-of-living (addressing the question of whether the cost of living for seniors may be rising faster than the CPI-W suggests). She also concludes, rightly in my view, that if policymakers fell compelled to act, it should in the form of lump-sum payments rather than any messing around with the COLA structure. President Obama endorsed that idea yesterday.

In a separate piece, Andrew notes that one group of seniors are getting a bum deal from the absence of a COLA: new retirees. They never received the benefit of the too-large 2009 COLA, but will have to bear the burden of no COLAs during the year or two that it will take for inflation to catch up to its 2008 peak.

Finally, another Andrew who’s an expert on Social Security–Andrew Samwick at Capital Gains and Games–suggests that any lump sum payments to Social Security beneficiaries in 2010 be paid for by reducing their COLAs the next time they are positive. The payments would thus provide some stimulus in 2010, but wouldn’t add to the long-term federal debt.

Taxes Are Not Created Equal

I’ve been working on a paper about America’s looming fiscal crisis. Earlier today I drafted a short (and as-yet-unfinished) section about tax policy that goes as follows:

Three decades ago, supply-side economists first argued that high marginal tax rates would discourage work, saving, and investment, and that well-crafted reductions in those tax rates could help boost long-run economic growth. Those observations have since become part of the fabric of mainstream economics. Meanwhile supply-side economics transformed into a doctrine that endorsed any tax cut at any time and that peddled the idea that tax cuts would inevitably pay for themselves.

Both of those notions are nonsense. Tax cuts rarely, if ever, pay for themselves, and they can do more damage than good.

As policymakers begin to confront our budget challenges and the conversation shifts from tax cuts to tax increases, it is essential that they understand the now-mainstream insight that taxes are not created equal. Taxes on income, for example, are usually worse for the economy than taxes on consumption. That’s why there’s a rising chorus of economists recommending the introduction of a value-added tax, rather than higher income taxes, if our nation decides it wants to support substantially higher government spending. High tax rates similarly tend to be worse for the economy than low rates. That’s why economists usually favor broad tax bases and low rates, rather than narrow tax bases and high rates. Finally, it’s preferable to levy taxes on bads rather than goods. Where appropriate, taxes on pollution (e.g., emissions of greenhouse gases) should thus be preferred over taxes on working, saving, or investing.

Little did I know that I have a subconscious ESP link with Bruce Bartlett over at Capital Gains and Games. In a long post setting out some of the themes in his new book, Bruce writes:

Everything that was true about [supply-side economics has] been fully incorporated into mainstream economic thinking and all that was left was a caricature.

All economists now accept the importance of marginal tax rates to economic decisionmaking, and organizations like the National Bureau of Economic Research publish vast numbers of papers on this topic.

During the George W. Bush years, however, I think [supply-side economics] became distorted into something that is, frankly, nuts–the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.

Use Sweden’s Playbook

During the financial crisis, the best single piece of advice I received was: “Use Sweden’s playbook.” Sweden faced a severe financial crisis in the early 1990s and had managed it–through a combination of guarantees, capital injections, and good bank / bad bank separations–about as well as one could hope.

As our attention turns from the financial crisis to our looming fiscal crisis, that advice continues to be useful. When its financial crisis ended, Sweden found itself on an unsustainable fiscal trajectory, yet found a way to pull itself out. As Jens Henriksson wrote in a fascinating paper (“Ten Lessons about Budget Consolidation“) in 2007:

In its Economic Outlook of December 1994 the OECD projected that the Swedish public debt would explode. By the year 2000 the public debt was expected to hit a record 128 percent of GDP. Today we know that the gross debt  for 2000 turned out to be less than half that figure at 53 percent. And within a few years the budget deficit, from a high of over 11 percent of GDP, turned into a large surplus.

How did Sweden do it? You should read Henriksson’s paper for all ten lessons, but two particularly important ones are:

  • Set clear, easily communicated budget goals (e.g., specific deficit targets that get the government debt under control).
  • Combine deficit-reducing measures into a single package so that it’s perceived as shared sacrifice, not as targeting specific interests.

These lessons are useful both for domestic politics and for world capital markets. Clear goals with shared sacrifice can, in the hands of strong political leaders, establish a commitment to budget consolidation, easing the path to success at home:

As a politician you can never explain why you need to cut pensions alone. But if, at the same time, you cut child benefits and unemployment insurance and raise income tax for the richest, you are on safe ground. The idea is to not single out the losers. 

At the same time, clear, credible commitments will be rewarded by world capital markets through lower interest rates, which can help offset some of the contractionary effects of tightening the budget. (Henriksson’s description of Swedish politics at the time occasionally sounds like parts of the Clinton years, when the opinions of the bond market loomed large).

Looking Back at Fiscal 2009

A few days ago, CBO released its latest snapshot on the federal budget, documenting the remarkable challenges of fiscal 2009, which ended on September 30. The key phrase in the report is “in over 50 years” as in:

  • At $1.4 trillion, the budget deficit was 9.9% of gross domestic product, the largest, relative to the economy, in over 50 years.
  • At $3.5 trillion, spending was almost 25% of GDP, the largest, relative to the economy, in over 50 years.
  • At $2.1 trillion, tax revenues were about 15% of GDP,  the lowest, relative to the economy, in over 50 years. (I get the sense that this point is less well-known than the other two.)

Other highlights from the report:

  • As expected, CBO estimates that the 2009 deficit was about $1.4 trillion, below the $1.58 trillion estimate in the Administration’s August budget forecasts. Assuming CBO is right, that means that next week, when the official Treasury figures are released, the Administration will be able to put a good news spin on the results, saying the deficit was less than it anticipated.  (As noted in an earlier post, CBO’s summer update, released on the same day as the Administration’s, predicted a $1.4 trillion full-year deficit, when calculated on an apples-to-apples basis. The report was a bit complicated to interpret, however, because its headline deficit estimate used different accounting for Fannie Mae and Freddie Mac, which resulted in a higher figure of about $1.6 trillion.)
  • As shown in the following chart, the deficit exploded in 2009 for three main reasons:

Budget Deficit Fiscal 2009

  • Tax revenues fell off a cliff (down 17% or $419 billion relative to fiscal 2008). The sharpest declines were in corporate income taxes (down 54%) and individual income taxes (down 20%). The declines reflect both the weak economy and, to a lesser extent, efforts to provide stimulus.
  • The financial rescue required $245 billion in new spending. TARP accounted for $154 billion, while cash injections into Fannie Mae and Freddie Mac accounted for $91 billion.
  • Other spending increased (up 13% or $347 billion relative to last year). These increases were spread across many spending programs, but were most pronounced for unemployment insurance (up 156%) and Medicaid (up 25%).

In addition:

  • Interest payments provided a sliver of good news. Interest payments fell by 23% (or $61 billion) thanks to low interest rates and small inflation adjustments on indexed bonds.
  • CBO estimates that the budget impact of the stimulus totaled about $200 billion by the end of September.

Talking about the Baucus Bill

I did an interview on Fox Business on Thursday to discuss CBO’s analysis of the revised Baucus health bill.

Going in, I had three basic points that I wanted to make:

  • First, as I discussed yesterday, CBO’s estimates indicate that the bill would cost a bit more than $900 billion over the next ten years, not the $829 billion that most commentators are using. The latter figure reflects the costs of expanding coverage, but does not include other efforts — e.g., paying more to physicians under Medicare and expanding the Medicare drug benefit — that are also included in the bill. The $75 billion difference strikes me as important in itself, but the larger issue may well be how much additional spending is in the House bill. The previous version of the House bill was often described as costing about $1 trillion over ten years, but if you include all the new spending in it, the actual figure was north of $1.5 trillion.
  • Second, as I noted in my discussion of the original Baucus proposal, the bill satisfies all the key budget tests, at least as it is written. The tax increases and spending reductions in the bill more than offset the costs of expanded coverage (and the other spending increases) over the next ten years and the subsequent decade. In short, the bill makes a serious effort to take budget concerns into account. On this score, it is much better than what we’ve seen from the House.
  • Third, there are serious questions, however, about whether the spending reductions and tax increases scheduled in the bill will actually come to pass. As we’ve seen with the doctors in Medicare, on the one hand, and the alternative minimum tax, on the other, policymakers often have a hard time allowing scheduled spending reductions or tax increases to occur. Thus, the actual budget implications of the bill may be worse than what CBO’s analysis suggests.

I haven’t watched the video, but my recollection is that I made points 1 and 3, but didn’t manage to work point 2 in.

On the lighter side, you will also see that (a) I still haven’t mastered my collar and (b) judging by my wife’s laughs, there’s an amusing moment at the end where you can tell that they are whispering in my ear: “You are still on camera.”

Opium Economics in Afghanistan

If you are troubled by opium production in Afghanistan, Jeff Clemens at Harvard has some bad news for you: eradication efforts are doing little to reduce opiate production. (ht: Tyler Cowen at Marginal Revolution). Moreover, to the extent they are having an effect, it’s to drive up prices and thus enrich the farmers who illicitly grow poppies.

I mention this not only because I find it interesting, but also because it nicely illustrates one of the ideas that I teach my microeconomics students. When you think about policy interventions – in this case poppy eradication efforts – it’s important to understand both the qualitative impacts of the intervention and the magnitude of those impacts.

Your basic supply and demand model will tell you, for example, that eradication efforts will shift the supply curve left (up), resulting in higher prices and lower production. To gauge the relative importance of those two changes, you need to know something about demand. And in this case, the key fact is that demand (from other countries, not Afghan consumers) responds very little to price. In the lingo, opium demand is very price-inelastic (Jeff estimates the elasticity at about -0.09). As a result, efforts to restrict supply translate primarily into price increases, rather than production declines.

The same problem has bedeviled U.S. efforts to restrict illicit drugs. (For example, see this old New York Times editorial about cocaine, which I use in my class – the editorial that is, not cocaine itself.) I haven’t followed the debate in recent years, but my sense is that many observers concluded that demand-side policies (i.e., discouraging consumption) were often a better strategy than supply-side policies. After all, successful demand-side policies would lower both consumption and price, thus lowering profits from drug production.

Given Jeff’s results, I suspect the same may be true in the world of opium production. If policymakers want to reduce consumption, they may want to turn to demand-side policies (assuming, of course, they can design demand-side policies that would have a substantive effect).

The Real Cost of the Baucus Bill

Earlier today the Congressional Budget Office released its much-anticipated preliminary analysis of the new Baucus health bill.

I will have more to say about the cost estimate later, but for now I want to make one simple point: The media are systematically misreporting the cost of the bill. For example:

  • The New York Times: “The budget office analyzed the bill … its newly projected cost — $829 billion over 10 years.”

If you read CBO’s analysis carefully, you will see that it says no such thing. Instead, it says that the provisions in the bill that expand health insurance coverage will cost $829 billion over the next ten years.

Why is that an important distinction? Because, as I noted the other day, the bill increases federal health spending in other ways. For example, it spends about $11 billion to avoid a sharp reduction in payment rates for doctors in Medicare at the end of the year. And it spends almost $21 billion to make the Medicare drug benefit more generous.

If you go through the CBO cost estimate and add up all the new health spending programs, you will discover that the actual cost of the bill is more than $900 billion:

Slide1

Perhaps I am nuts, but I think that policy debates should be informed by actual facts, including about budget impacts. And despite the ease with which I have learned to throw around the word “trillions”, I still think $75 billion is a lot of money.

So let me once again implore everyone commenting on the health debate: There is a difference between the cost of the Baucus bill ($904 billion) and the cost of its provisions to expand coverage ($829 billion). It is understandable that most commentary focuses on the health insurance provisions. But we should not forget the other $75 billion in spending on other initiatives. Dollar-for-dollar they deserve as much scrutiny as the coverage expansions.

Note on the numbers: The spending on the doctor fix is easy to find in the CBO report; it’s the first item on page 5 of the detailed estimates of direct spending impacts. The increases in other health spending programs are sprinkled through the nine pages of the direct spending analysis. I calculated the $64 billion figure by adding up all the individual line items that increased direct spending, with a couple of exceptions. First, I did not include the interaction effects that CBO lists as the end of the estimate because I was not sure how to allocate them; the interactions are large and could have a material effect on my estimate, potentially up or down. Second, there were a couple of programs in which it seemed appropriate to net a spending increase against a cost reduction before including it in my total (those cases were small). I am certainly open to other suggestions about how to add up the other spending in the bill.