On healthcare cost again

I highlighted in an earlier post that Robert Samuelson in an Op-Ed piece appeared to be laying the blame at the wrong people and about the wrong issue when it comes to the deficit problem.  I had gone on to point out that the real issue is that we have a massive redistribution problem from the young and healthy to the old and sick.  Current projections suggest that if medical costs continue to rise as they did until before the recession, these costs would be more than 85% of the total Federal budget.

Today Robert Samuelson has a piece in which he basically writes about the same issue that I was highlighting.  He points out that "In fiscal 2012, Social Security, Medicare, Medicaid and civil service and military retirement cost $1.7 trillion, about half the budget."

Samuelson then goes on to assign blame to both sides.  He blames the liberals for believing these benefits are sacrosanct, and the hypocritical conservatives, like Paul Ryan, whose "major Medicare proposal (in effect, a voucher) wouldn’t start until 2024. Most baby boomers escape meaningful benefit cuts. As Holzer and Sawhill fear, most of Ryan’s cuts affect programs for the poor."  He also points out that this isn't an issue that state and local governments can escape unscathed and that people unrealistically want cuts without cutting any of this spending.

He feels Obama should be using his bully pulpit to change the conversation.

I agree.

Incredible Nixon treason

Nixon had to leave his office in disgrace.  However, in recently released tapes, a much more serious revelation has surfaced - that Nixon actually sabotaged Lyndon Johnson's peace talks with the South Vietnamese.  The news, which appears to have received no play here in the US, comes from the recently released LBJ tapes. 

Essentially, it seems, Nixon secretly offered the North Vietnamese a deal.  He told them, if they stopped negotiating with Johnson, he'd give them a better deal.  The news wasn't used by his opponent, who had been informed of Nixon's activities by Johnson.  Nixon went on to escalate the war which cost 22,000 US lives. 

I am not sure how many might have been saved had he been outed, but, if this report is correct, Nixon may have caused more US deaths than anyone else in history.

Do we have a deficit problem, part II?

In my previous point I had pointed out that Krugman had computed that the short term deficit problem is serious.  I had also written about the long term deficit problem.  Well, let's take a second look at that.

In Neil Irwin's analysis, he points out that the US recovery in this recession has been worse than in previous recessions.  Here's the chart to prove it:



However, before you start blaming the Keynesian economics Obama has employed, consider the comparison of what has happened in the US with what has happened in the austerity oriented economies of Europe and UK:



Essentially, the US economy has outperformed economies where austerity was employed.

Meanwhile, much of the growth shortfall may be explained by this chart:


As you can see, State and Local governments have been shrinking dramatically.  There is some evidence that the recovery may in fact have just as fast as historical ones if that had not been the case.

However, what about the debt?

Well, Sarah Kliff has a post shows that so much of the future depends on what you assume.  In this chart, Sarah Kliff shows that if you project out Medicare spending assuming the growth in costs over the last few years, it turns out its expected to grow at the same pace as the GDP.



Huh?  If that's the case then in fact, then the cost of Medicare by 2085 would be 4% of GDP instead of 7%, which basically means, as Krugman has been suggesting, there is no deficit problem - long term or short term, and that as long as the US can sustain growth, debt as a percentage of GDP will drop and so there won't really even be a debt problem.

Now, the BIG question is will this sustain?  The answer is, frankly, we don't know.  It is interesting though that one of the reasons for the healthcare cost decline in the last few years is a dramatic drop in hospital readmission rates:



Readmission is something the Affordable Care Act penalizes, but its unclear whether the link is coincidental or causal.

Do we have a deficit problem?

In an article in the NY Times, Paul Krugman points out something that should be glaringly obvious to anyone who has been paying attention, that the short run deficit problem is somewhat solved.  The current US deficit is projected to be $845 billion, that's roughly 6% of the US GDP.  But, that's down from a peak of $1.4 trillion at the height of the recession (which was almost 10% of US GDP).

Now, $845 billion is a very big number, but remember, we are still not at full employment.  If we had been at full employment, the US budget deficit would have been $423 billion, i.e. roughly 3% of GDP.

Two things to point out:

1. While Krugman is sanguine that this is sustainable, the crowding out of Federal expenditure on almost everything apart from Health and Retirement is still a long term issue.
2. However, 3% of GDP is really very much within the realm of what is manageable as evidenced by the lack of panic during the Bush years with a similar full employment budget deficit, so the short term deficit crisis is mostly artificial.

By the way, Krugman's biggest assumption is that the US economy can grow its way out of the problem.  It probably can, but one of the most important drivers of the growth is likely to be immigration and it seems that there is some bipartisan movement on that front.  Still far from certain they'll succeed at getting something out the door though.

The redistribution problem and the sequester

In an Op Ed piece today, Robert Samuelson argues that the Sequester is really Kennedy's fault.  That by going for a massive budget deficit through tax cuts in peace time, he set the stage for the unbalanced record of 43 budget deficits and 5 budget surpluses since.

In some sense Robert Samuelson is right.  However, as the record below shows, it really isn't quite so simple.  There have been a total of 12 surpluses since 1940 (7 under Democratic Presidents, 5 under GOP), and while surpluses have in fact become much rarer in modern times, blaming kennedy, whose policies would be an anathema to the GOP, seems much to simplistic.


I speculate that it was a confluence of factors.  Some, like the collapse of the Gold Standard, are identified by tea party favorites like Ron Paul.  The "supply side" economics - monetary theory and the idea that tax cuts will lead to increased revenues in all cases, may have had a lot to do with it too.  After all, Reagan cut taxes expecting higher revenue, but the promised revenues never materialized.

However, Samuelson and others are, in many ways, focusing on the wrong problem and not addressing the elephant in the room.

To explain why, let me first demonstrate that the fundamental premise of the sequester debate is wrong,

Here's a very good summary of the sequester.  The purported reason for the sequester debate is that we have massive deficits.  However, as the president's 2013 budget shows, we have proposals on the table that would reduce the budget deficit to about 2.8% of GDP by 2022.  Also, the sequester delays the long term debt crisis by two to three years at most.   This isn't surprising.  Significant portion of the short term deficits, were due to temporary factors like short term spending increases and revenue shortfalls.  

So, what's the elephant in the room?  Well, there is a redistribution of wealth taking place, from the young to the old.  Here's what happens in the President's budget proposals:

To put this in perspective, if you exclude interest payments, of the total amount that Congress chooses to spend, a full 44% currently goes towards Social Security, Medicaid, and Medicare.  By 2022, even with the President's proposals, a full 57% of the Federal spending excluding interest will be on these programs.  This gets worse if you project it out further, ultimately growing to over 85% of the budget.

To balance the budget, we have to find the money from somewhere.  Guess what gets cut?  Well, everything else.  To see how this works, look at the composition of the sequester cuts:




Everyone talks about this as an "entitlement reform".  The language hides the seriousness of what is going on. The fact is that the US Federal Budget is increasingly a retirement program to sustain which we have to cut investments in Defense and Discretionary spending, which includes R&D and education, i.e. stuff that invests in the future.  The US is therefore become more and more of a backward looking country, increasingly unable to invest in its future.

One reason for this is the effect on life expectancy.

US life expectancy has risen dramatically in the last century and has risen by almost a decade in the last 40 odd years.  More pertinently, the life expectancy of those surviving to 65 has increased by almost 33% since the 1940s.

The net impact of this is that the cost of the retirement programs has also increased.  The question we have to ask ourselves is that with modern education requiring 20 years of education, i.e. no work, can we afford another ~15-20 years of retirement?  Can we really afford to have a situation where people spend nearly half their lives not working?  And can we afford to pay for that through taxes?