Deficit Doves and Owls: How to Worry About Healthcare Costs

Michael Stephens | January 20, 2012

You may not agree with Alan Blinder when he writes in the Wall Street Journal that the budget deficit should be an issue in the 2012 campaign.  But it certainly will be.  And Blinder deserves kudos for pointing out that there are no immediate or near-term economic problems stemming from US deficit and debt levels:

Myth No. 2 is that America’s deficit problem is so acute that government spending must be cut right now, despite the struggling economy. And any fiscal stimulus, even the payroll-tax extension, must be “paid for” immediately.

Wrong. Strange as it may seem with trillion-dollar-plus deficits, the U.S. government doesn’t have a short-run borrowing problem at all. On the contrary, investors all over the world are clamoring to lend us money at negative real interest rates. In purchasing-power terms, they are paying the U.S. government to borrow their money!”

Blinder also points out that if you accept the CBO’s long-term budget forecasts (James Galbraith notes some problems with the projections here), then the issue is entirely one of healthcare costs.  Deficit doves and deficit owls (proponents of “functional finance”) will dispute the optimal or sustainable level of long-term deficits, but if you care about the long-term deficit, then you care about government healthcare costs.  And growth of government healthcare costs is largely a function of cost inflation in the private market.  So if you have any interest in the long-term deficit, then you have to have a plan for controlling long-term healthcare costs system-wide.  If you don’t have such a plan, you’re engaged in some other type of project.

If you haven’t seen it already, this is a great utility that’s been linked to over the years, allowing you to see what the US budget deficit would look like if we spent the same amount per capita as other nations.  For the owls, this won’t be a matter of long-term debt and deficits, but of efficiency:  what exactly are we getting by spending more than twice as much, per capita, as other wealthy nations?

Randall Wray and Marshall Auerback put out a Levy Institute policy brief in 2010 on their vision for healthcare reform that featured giving people under 65 the option to “buy in” to Medicare (you will recall that at one point during the health reform battle this provision looked like it might be included in the final bill.  It was ultimately dumped by Joe Lieberman).  Read the policy brief here.

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  1. Comment by Curt DoolittleJanuary 20, 2012 at 2:29 pm   Reply

    Yes, but we all KNOW that healthcare costs are the long term problem with the US budget.

    We also know WHY healthcare costs are the problem:
    1) extending the last year of life.
    2) experimental procedures.

    We also know why it’s a difficult problem to fix healthcare costs:
    3) Because there is no market system by which doctors can choose to deny coverage for experimental procedures and extending the last year of life.
    4) Because there is no market system, we must create a non-market system (a bureaucratic system) or “DEATH PANELS” to deny coverage for experimental procedures and extending the last year of life, in order to contain costs.

    We also know why bureaucratization of experimental procedures is dangerous:
    5) Because experimental work is expensive, research and development conducted by trial and error – most of which fails to produce beneficial results.

    We also know why conservatives (republicans) dislike the bureaucratic method:
    6) Because it is impossible to work harder, apply more discipline, and use one’s own initiative and resources, in order to secure access to the best doctors, facilities, and experimental treatments.

    And it’s disingenuous to argue that this is a financial problem. It is in fact, a series of moral hazards – in the broadest sense of the term.

    (The technical, mixed-economy solution, would be to transfer the costs that were rejected by the Death Panels for experimental procedures and extension of life to those poor people in need of health care. I’m not advocating that. I’m just suggesting that it’s the only known solution that avoids perverse incentives for all parties, while maintaining a closed healthcare ecosystem.)

    We already solve the problem of transfers by subsidizing insurance companies for automobile drivers. There is no reason that we cannot sponsor (insure) non-profit, insurance companies that specialize in coverage for the underclasses, and make use of the visa/mc network to manage payments for services. We insure banks. Why can’t we insure insurance companies as a proxy for serving the disadvantaged?

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