Arnold Kling  

James Hamilton on the Great Race

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He writes


If Medicare and Medicaid spending continue to grow 3.1% faster than GDP, by 2150 the federal government would consume 370% of GDP.

Hold on a sec.

(See also, Robert J. Samuelson on AARP's America Is a Mirage)

The ratio of MM (Medicare and Medicaid) spending to GDP can be broken into the ratio of MM to total health care spending (HC) and the ratio of HC to GDP:

MM/GDP = (MM/HC)*(HC/GDP)

The reason that MM/HC has been rising is largely demographics--more old people, living longer. The reason that HC/GDP has been rising is that health care is that, as Robert Fogel puts it, we are approaching saturation with consumer goods, so now all that's left to want more of is education, health care, and leisure.

Going forward, the right way to forecast the ratio of MM to GDP is to forecast the path for the two components. At most, you could have each component asymptotically approach one.

So, extrapolating a trend is not a good way to make a forecast.

Having made that point, I agree nonetheless that the ratio of MM to GDP bears watching. See The Great Race.

My solution to the problem is to get control of the ratio of MM/HC by raising the age of eligibility for Medicare. In the most extreme case, we could Phase out Medicare.

Hamilton has a different approach.


Rather than vote on what benefits they want to cover, let Congress vote each year on how much money to spend. That means Congress exchanging the rich uncle role for one it which it says, "we'll help with what we can afford, but you're responsible for the rest." Let the debates each year be over just how generous a dollar payment Congress is willing to provide, rather than who can come up with the longest list of goodies.

In other words, he wants to change the welfare state from a defined-benefit plan to a defined-contribution plan, where the relationship between benefits and contributions is determined by the reality that government is a tax-and-transfer institution, not a savings institution.

A less wonkish approach would be a balanced budget amendment that includes entitlement spending. Have we reached the point where the benefits of such an amendment exceed the costs in terms of fiscal flexibility?


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COMMENTS (9 to date)
Dave Schuler writes:
The reason that HC/GDP has been rising is that health care is that, as Robert Fogel puts it, we are approaching saturation with consumer goods, so now all that's left to want more of is education, health care, and leisure.
Is that true? Or are too many dollars chasing too little supply? I think that there are a lot more people who are undertreated because it's too expensive than there are people who are overtreated because they've got nothing else to amuse themselves with.

Let's take your own case. Are you seeking treatment for things that don't really need it? Or do you avoid seeing the doctor unless you're really sick? That's what I do and I don't know many people who do anything different.

James Hamilton writes:

Actually, I regarded the statement that government spending would comprise 370% of GDP by 2150 not so much a forecast as a calculation that something has to change here.

Robert Schwartz writes:
And to those who say that running this kind of trade deficit cannot go on forever, I offer the words of my late, great father, Herbert Stein, when asked about this very problem. "If a thing cannot go on forever," he said, "it will stop."

Ben Stein


as Robert Fogel puts it

Don't I often se the name Pigou in connection with theorization like this?

dearieme writes:

I've spotted the flaw. Mr Hamilton assumes that there will still be a federal government in 2150.

jaimito writes:
government spending would comprise 370% of GDP by 2150

Hopefully, they will think something till then. If not, they may have a problem.

spencer writes:

So the solution is to do what every other OECD country does -- put a limit on health care expenditures and use lines, etc., to ration care.

It just means that one way or another we will ration healthcare, but we already do that anyway.
Now we use primarilly prices to ration healthcare,
in the future we will give greater weight to nonprice factors.

So what else is new?

Randy writes:

Spencer,

We can still use price. What we need to do is get over that idea that healthcare can somehow be provided equally. We can create a basic healthcare system for people of limited means that coexists with the current system. The only thing holding it back is the belief that top quality healthcare should be available to all. That ain't gonna happen. And the sooner we get past thinking it can, the sooner we can get to creating the basic system that is needed.

spencer writes:

Randy -- I do not disagree -- Note I said we will just give more weight to nonprice factors.

the point is that we can not continue too much longer on our present course without something happening -- and the greatest effective pressure for change probably will come from business.

Randy writes:

Spencer,

Agreed. Business is forcing the issue by dumping health insurance. But I think the solution is closer than most imagine. There are countless RNs, Physicians Assistants, etc., that could operate neighborhood clinics profitably at a cost that nearly anyone could afford. Let them.

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