One More Reason to Stop Panicking About the Long-term Deficit

Michael Stephens | August 27, 2013

The case for being alarmed about the US budget deficit — more specifically, for being worried that it’s too high, or will be too high in the next decade or two — continues to weaken, and this is so even if we limit ourselves to the deficit hawks’ own theoretical turf. These days, you don’t need to have read Abba Lerner to know that we should be moving on to more pressing matters.

Now that the deficit is shrinking fast, the standard fallback is to shift the focus to the long term. The go-to story for long-term deficit anxiety has to do with the prospect of healthcare costs rising much faster than the rate of economic growth (in the medium term, it’s more about predictions of how high the Federal Reserve will raise interest rates).

The problem is that this healthcare story is badly out of date. The last several years have seen a significant slowdown in cost growth in the medical sector. Initially, it could be suggested that the recession was playing the main role here (so cost growth would simply snap back to previous trends when the economy recovered). However, more and more evidence is coming in to suggest that it’s primarily changes in practices and behavior unrelated to the recession that are “bending of the cost curve” (hence the trend may be more likely to persist). From the abstract of a new Congressional Budget Office working paper (pdf) that looks at Medicare spending in particular:

Growth in spending per beneficiary in the fee-for-service portion of Medicare has slowed substantially in recent years. The slowdown has been widespread, extending across all of the major service categories, groups of beneficiaries that receive very different amounts of medical care, and all major regions. We estimate that slower growth in payment rates and changes in observable factors affecting beneficiaries’ demand for services explain little of the slowdown in spending growth for elderly beneficiaries between the 2000–2005 and 2007–2010 periods. Specifically, available evidence does not support a finding that demand for health care by Medicare beneficiaries was measurably diminished by the financial turmoil and recession. Instead, much of the slowdown in spending growth appears to have been caused by other factors affecting beneficiaries’ demand for care and by changes in providers’ behavior.

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