Bryan Caplan  

Socrates Meets Deficit Neutrality

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Mankiw tries his hand at Socratic dialog.  It begins:
Friend: I am going to take off a few days from work and fly down to Bermuda for a quick vacation.

You: But isn't that expensive?  Won't that just add to your growing debts?

Friend: Yes, it is expensive.  But my plan is deficit-neutral.  I have decided to give up that half-caf, extra-shot caramel macchiato I order at Starbucks twice every day.  I really don't need that expensive drink.  And if I give it up for the next three years, it will pay for my Bermuda trip.

You: Well, then, how are you going to solve the problem of your growing debts?

Friend: I am going to figure that out as soon as I return from Bermuda.
Bonus: Mankiw, unlike Socrates, isn't afraid to break voice at the end of the exchange to make sure that we get the point:
Even if you believe that the spending cuts and tax increases in the bill make it deficit-neutral, the legislation will still make solving the problem of the fiscal imbalance harder, because it will use up some of the easier ways to close the shortfall.

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COMMENTS (8 to date)
Randy writes:

There are no "easy" ways to close the shortfall, only hard ways. The good news is that the hard ways are real, and it is only a matter of time before they become inescapable.

E.g., read an article this morning about a school district in Kansas City that is closing half of its schools.

Ted writes:

I wouldn't really call it a Socratic dialogue since they were usually well-thought out rather than reducing a serious issue, like providing health care to millions of people, to a vacation to Bermuda.

One of the problems with the entire stupid dialogue is that he assumes deficit neutrality, yet most of the evidence suggests the health care bill is not deficit neutral. While the first ten year savings are quite small, if you believe the CBO that claims it will reduce the deficit by 0.25% - 0.5% of GDP, you are getting closer to an estimated $1 trillion savings over twenty years, which is hardily "deficit neutral.". Arguably this is also a low-ball estimate since many of the experimental cost savings measures aren't estimated.

Now you can argue that it's too difficult to project spending and GDP out that far or you can argue the CBO is off-the-mark. But Mankiw isn't arguing that. He's starting from the premise that it's deficit neutral when most analysis of the bill say it's not deficit neutral. So, I don't understand the analogy.

What the analogy really reflects is that Mankiw believes providing health care to millions of people is just government largess, no different that a trip to Bermuda. You can argue about the specifics of a bill, but I think people are delusional that health care can be fixed "on the cheap" by doing something trivial like health care savings accounts or tort reform or opening state lines (I think the latter would have the largest effect, but it's still not nearly enough). I guess I'm an Arrow guy in that I believe that by it's very nature health care is a very imperfect market, arguably the most imperfect market out there. I don't think small, quick-fix free market solutions will do much of anything to insure people. Even if you assume that the market is perfect, the rate of growth in medical expenses, mostly due to medical technology, is going to set up a situation that more and more people cannot afford insurance and will require massive tax credits to buy health insurance, which certainly isn't deficit neutral.

This gets back to my first point though. If you want to argue that our deficits is most important than the health and autonomy of millions of Americans, then go ahead and make that argument. But don't reduce the issue to some cute, garbage analogy like a trip to Bermuda.

John Thacker writes:
While the first ten year savings are quite small, if you believe the CBO that claims it will reduce the deficit by 0.25% - 0.5% of GDP, you are getting closer to an estimated $1 trillion savings over twenty years, which is hardily "deficit neutral.". Arguably this is also a low-ball estimate since many of the experimental cost savings measures aren't estimated.

The CBO claims are predicated on the taxes and other revenue starting immediately, but the subsidies starting in 2014. You're comparing 10 years of the revenues to six years of expenditures. That's absurd.

aretae writes:

Ted,

It appears that Mankiw is not dismissing the problem quite as much as you suggest. Perhaps his Bermuda option is flippant...but his key point stands. In 4 lines:

1. We have a MASSIVE problem coming on financing the government-run part of health care, as per my post here.
2. The bills we see are trying to finance health care by doing the easiest steps to offset the large costs.
3. This is analagous to buying something (even something important) you want when you're insolvent (or will be next year). Nominally ok, but way less smart in the long run than just cutting back.

Ryan writes:

Ted,

The bill creates guaranteed new spending offset by hypothetical savings. You have to discount the savings by the likelihood that they actually materialize. I haven't seen any attempt at this.

Furthermore, you may or may not be right about the impact of the various free-market approaches. However, the rational approach would be to implement changes in order of their modifiability. If decreasing interstate barriers to competition doesn't provide sufficient benefit, move on to the next idea. However, if you start with the types of changes that the Democrats are trying to implement, you can't easily unwind them if they don't work.

Why is there so little discussion (or perhaps even understanding) of risk management on this issue?

wintercow20 writes:

"I guess I'm an Arrow guy in that I believe that by it's very nature health care is a very imperfect market, arguably the most imperfect market out there. I don't think small, quick-fix free market solutions will do much of anything to insure people."

1. I don't want to insure people. Call me a heartless slob, or something like it, but I am not the only person who feels that way. Nor do I want to pay for food stamps, or welfare, or anything resembling.

2. Just saying imperfect markets a lot of times does not make it so. Discuss the externalities, and how the government is the best way to address them (and did not cause them in the first place). Discuss the market power problem, and how the government is the best way to address this (and did not cause it in the first place). Discuss the information problem, and how the government is the best way to address it (and did not cause it in the first place). Then we at least have a starting point.

3. I'll grant you point 2 for the sake of argument. It still does not follow that we ought to do anything about it. There's a huge "market failure" right now in getting people to Mars in order to escape the horrific events that are happening on earth today - ought we address it? There was a huge market failure in 1850 - if you got a bacterial infection, you were probably going to die from it.

4. Please do enlighten us how in a well functioning market, the increased prevalence of medical technology must increase medical expenses, which must increase health insurance premiums and so therefore we'll require massive tax credits to buy insurance? Better technology everywhere else lowers costs - so should we not ask why it doesn't lower costs in medicine? Better technology does not mean insurers have to cover it or that I have to buy it. Why can I not buy into a lifetime policy right now that guarantees me current technology, or future cheaper technology, and makes me pay out of pocket if I want anything new? And please do help us understand the difference between medical expenses and medical expenditures. Costs and expenditures are not the same thing. Better technology and understanding have substantially lowered the cost of treating eye diseases today - yet we are spending a heck of a lot more on them than 100 years ago. Where is that justification for doing something about it? Should you subsidize me to get lasik surgery because I cannot afford this new technology? I have kids - and I don't make very much, and my greedy insurer won't cover that for me after all.

Douglass Holmes writes:

Medical Savings Accounts are not a 'quick fix' by any measure. Their purpose is to encourage health insurance with higher deductibles that will force people to make choices about their healthcare rather than just letting someone else pay for it. This is meant to bring down the cost healthcare by making healthcare consumers more careful about how they make their healthcare expenditures. There is nothing 'quick' about it. It will take years for this to have any effect.

Nick writes:

Douglass Holmes,

The idea that MSAs will bring down the cost of care is absurd, 1/6 of the country has single payer (medicare) and the hospitals still have to cover the costs of the destitute. The costs will end up being offloaded on the consumer who is paying cash.

making people pay for their own care is good in theory but they are fighting upstream against the tide of rising costs.

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