Arnold Kling  

The Substantive Precedent in the Health Care Bill

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The controversy of the moment is the procedural precedent in the health care bill. No comment on that.

What troubles me is the substantive precedent of using future cuts in Medicare benefits as a funding source. This is really weird, if you think about it.

Imagine that your crazy uncle Fred had bought a dozen cars on credit. As a result, he faces car payments far in excess of what he can afford. He comes to you and says he has a plan that in a couple of years will reduce his car payments by a few thousand dollars. "Now I have the money for a down payment on a boat!" he exclaims, as he runs off to the boat dealer.

The equivalent is for Congress to treat future cuts in Medicare as if they were a newfound source of wealth to be tapped. Once they adopt this precedent, they can increase spending on whatever they want, in unlimited amounts, while claiming deficit neutrality. Future Medicare spending is so high that you can always come up with cuts, as long as they deferred.

CBO's Doug Elmendorf discusses the use of promised future cuts in budget scoring, and it is evident that he is queasy about it. I think it sets a very dangerous precedent. Even if health care reform passes, I hope that Congress does something to close this loophole in its budget scoring procedures. If I were the Republicans, I would introduce a bill that bans the use of promised future cuts as a financing mechanism.


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CATEGORIES: Fiscal Policy



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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/3198
The author at Villainous Company in a related article titled Smoke and Mirrors writes:
    Only in Obama's America could a bill that adds hundreds of billions of net spending to the deficit be called "deficit neutral": ON Thursday, the Congressional Budget Office reported that, if enacted, the latest health care reform legislation would, ove... [Tracked on March 22, 2010 5:01 PM]
COMMENTS (12 to date)
MernaMoose writes:

The precedent this will set, is that Uncle Sam is allowed to slit his own wrists without interference from We The People, anytime a large enough group of politicians in Washington decides that's what they want to do.

We The People are merely obligated to participate and pay.

In the long run democracy is a political race to the bottom, because you can always get away with sinking to or slightly below the level of your opponent. But this takes us from a downward slope to an all-out nose dive.

I say we'll be in the same place as Greece in under a decade. Anybody want to bet on what career paths have any hope of surviving the impending fiasco?

The only thing I can come up with, is either becoming a tax collector, or else starting a chain of low cost mortuaries. Because the only certainties are death and taxes.

ed writes:

This is the same point made by Greg Mankiw a few days ago (great minds think alike):

Imagine you have a friend who has a budget problem. Every month he spends more than he earns. His credit card bills are piling up. He is clearly on an unsustainable path. Then one day he comes to you with an idea.


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.

You: But in light of your budget problem, maybe you should give up Starbucks and skip the Bermuda vacation. Giving up Starbucks could be the easiest way to start balancing your budget.

Friend: You really aren't any fun, are you?

http://gregmankiw.blogspot.com/2010/03/problem-with-deficit-neutrality.html

John Thacker writes:
I would introduce a bill that bans the use of promised future cuts as a financing mechanism.

But how would you do that besides reducing the budget window to a single year?

I'd settle for at least saying that cuts can only be scored if they take effect immediately, instead of being phase in or delayed. Is that what you mean?

8 writes:

Could using Medicare cuts fund the abolition of the income tax? Fight fire with fire...

R. Richard Schweitzer writes:

Of course all this hoakum in the Senate Bill about Medicare "Cuts" - PAYING- for anything is a breakfast of mule biscuits.

It's not something you want to eat, and probably can't digest.

But, the essence is: "We are going to 'PAY' that is, offset the impact on the budget [at the point where the PAY adds to a calculation of the deficit - not for the provision of actual revenues] by transferring the cause of that amount of impact on the budget to the other program." It's budget neutering.

Reducing expeditures scheduled, but not yet made, for program A, does not create any revenues for program B.

And, of course, we could go on examining the mule biscuits to see what the mules ate.

Here is a simpler version. All budget savings are based on this old joke.

The boy ran into the house and said exitedly, "Dad, I saved a dollar today by running home behind the bus."

The gruff father gave him the back of his hand. "Stupid child, you could have saved five dollars by running home behind a cab."

Trader writes:

Are you questioning the integrity of the non-partisan CBO?

If a corporation put in place a good cost-cutting plan and the markets (i.e. financial analysts) reacted by pushing up the price of its stock, and the company then used the opportunity to issue new stock to launch a valuable new acquisition or investment, you'd denounce that as well?

So what are the lessons we are to take from your post?

(1) Arnold Kling is against plans to cap costs in the largest and most out of control entitlement program.

(2) Arnold Kling is against government borrowing of any sort, no matter what its purpose.

(3) Arnold Kling is against borrowing against future, independently corroborated, cashflows of any sort. In short Arnold Kling thinks we'd be better off without credit markets.

(4) Arnold Kling is against repairs to our failed medical insurance markets?

Spelling it out this way makes me sound a bit facetious, but seriously, what is your analytical point?


Mercer writes:

Medicare cost growth is the biggest problem in the budget. What Obama is doing is creating an incentive to lower it's growth.

"If I were the Republicans, I would introduce a bill that bans the use of promised future cuts as a financing mechanism."

Why do you support the official GOP position that retired people over 65 have a blank check from the treasury while people working for small business get zero help from the government with their insurance problems? Do you really think this is the best use of the federal budget?

Yancey Ward writes:

I give the proposed cuts one year or less before they are repealed. That is the real problem with financing new spending with proposed cuts here. For example, Congress could cut another $200 billion this year by doing nothing at all, but they have promised to fix this cut later this year as a carrot for AMA support of the health care bill.

Yancey Ward writes:

And who wants to bet against these cuts' repeal being used to buy support for some additional healthcare reform that expands government spending, financed, of course, with cuts in government healthcare spending somewhere else?

fundamentalist writes:

"What troubles me is the substantive precedent of using future cuts in Medicare benefits as a funding source."

It's only troubling if you think politicians are honest. There is no way they will stick to those promised Medicare cuts. It's political suicide. Congress frequently promised to cut Medicare spending only to change its mind at the last minute and raise spending. That has been the pattern for decades.

Evan writes:

This article showed me how ridiculous some of the decisions our government makes are. If a decision our government makes can be compared to a decision your crazy uncle Fred would make its probably not very smart. Our government should use the money they will gain in future Medicare cuts to pay off some of the debt we are in as a country. I believe Obama should worry less about his health care bill and more about the national debt.
I think Obama needs to get his priorities in check. Government healthcare is not something I believe this country needs or wants. If Government health care was necessary we would have had it a long time ago and there wouldn’t be so many people fighting it. My point is Obama should be much more responsible with his spending and try to minimize the debt we are in.

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