Arnold Kling  

A Budget Paradox

PRINT
Henderson Talk at Rockford Col... Rescued from the Comments...

Consider the following two sentences:


1. It is very difficult to cut Federal government spending, because so much of it is mandatory.

2. It is very difficult to increase Federal government spending, because so much of it is mandatory.


Reciting sentence (1) gets you admitted into the club of Expert Budget Pundits.

Reciting sentence (2) gets you sent to the loony bin. Or at least to the data, which show that Federal outlays went up 108 percent from 2000 to 2010, while the Consumer Price Index only went up 26 percent. (Below the fold, I will give a breakdown of outlays by category, if you would like to see that.)

The data indicate that it is not very difficult to increase Federal government spending, in spite of the large portion that is mandatory. Why not? Some hypotheses:

1. We tend to see discretionary increases in "mandatory" spending. As in the prescription drug benefit. Note that at the time the prescription drug benefit was enacted, nobody said, "You know, on the whole, the elderly are doing fine. We want to provide prescription drugs as an in-kind benefit, but maybe we should cut back on other transfers to the elderly in order to maintain generational balance."

2. The government's "cost of living" goes up much faster than the CPI. For example, with Medicare and Medicaid, outlays are tied to health care costs, and we all know that health care costs are rising faster than inflation.

Every time a budget wonk says "health care costs," you should say to yourself "utilization of medical services." That way, the phrase "we need to slow the growth of health care costs" becomes "we need to slow the growth of utilization of medical services," which is a much more accurate description of what has to occur.

An effective way to hold down health care spending would be for the government to only pay for the medical services that you would have obtained in 2000, so that services above and beyond that are not paid for. No new equipment. No new forms of specialist practice. That would work conceptually to control health care "costs," although I am not saying that it could be implemented in practice. Still, the point is that when we treat paying for every new medical gizmo and specialist visit as mandatory, we are giving the budget a self-inflicted wound.

3. Demographic trends, such as the longer life span and fewer children per household, are starting to bite. In that case, with the Boomer retirement bulge just starting, the worst is yet to come.

4. Note, however, that, apart from "net interest," spending on every major category (not just "mandatory" spending) has risen much faster than the CPI over the past ten years. Without touching defense, Medicare, or Social Security, going back to the spending levels of 2000, adjusted for inflation would chop over $500 billion from the annual budget.

Or maybe the answer to the paradox is that when it comes to the Federal Budget, spending is discretionary when somebody proposes an increase in its rate of growth but mandatory when somebody proposes a decrease in its rate of growth.

Spending, in billions, vs. Consumer Price Index



Spending Category2000 level2010 levelPercentage increase
Consumer Price Index17421926 %
Total Federal Outlays17893721108 %
Defense294719144 %
International1751197 %
Health154372141 %
Medicare197457132 %
Income Security254686170 %
Social Security40972176 %
Net Interest223188-16 %
Other240526119 %

Source: for spending, I took the figures in the 2010 Economic Report of the President, which by now are out of date for 2010. For the CPI, I took the data as of the January 2011 release by the Bureau of Labor Statistics.


Comments and Sharing


CATEGORIES: Fiscal Policy



COMMENTS (12 to date)
MikeP writes:

An effective way to hold down health care spending would be for the government to only pay for the medical services that you would have obtained in 2000, so that services above and beyond that are not paid for.

Yes!

Though ten years may be a little short. I have thought 20 to 30.

This approach ends the whole moral hazard of not buying insurance. No mandates required. If you need medical care the government has to pay for, you get the medical care your parents had at your age. This cleanly encodes the two-tiered health care that is absolutely necessary going forward if society is to be fair to those with money yet not heartless to those without or who choose to do something else with it.

Jeremy H. writes:

An effective way to hold down health care spending would be for the government to only pay for the medical services that you would have obtained in 2000, so that services above and beyond that are not paid for.

But Arnold, don't you read Marginal Revolution? Didn't you see Tyler's post today that there haven't been any medical innovations lately? So year 2000 medicine is basically the same as year 2011 medicine! Or even taking MikeP's modified suggestion above shouldn't matter (20-30 years ago), according to TGS reasoning.

Æternitatis writes:

Progressives often refer to the repeal of the Bush income tax cuts as nothing more than a return to the supposedly halcyon Clinton tax rates. That is not quite true, as ObamaCare includes substantial income tax hikes above and beyond the Clinton era rates. But, fine, we can return to Clinton era income tax rates, if we also return to Clinton era spending rates.

david (not henderson) writes:

Ultimately, the decision as to what expenditures are discretionary or "non-discretionary" will be determined by the financial markets (thankfully).

8 writes:

Why isn't the solution to Medicare and SS "money in, money out." It's how the American people believe it works.

The tax rates are set, make SS and Medicare off-budget, for real, send tax revenue directly to these programs and have a "non-political" commission made up of Democrats and Republicans decide how to cut.

Floccina writes:
Note that at the time the prescription drug benefit was enacted, nobody said, "You know, on the whole, the elderly are doing fine. We want to provide prescription drugs as an in-kind benefit, but maybe we should cut back on other transfers to the elderly in order to maintain generational balance."

But some did argue that it would save money by helping avoid surgery.

I have begun to have hope that healthcare spending will not continue to rise so fast and that it does not "need" to keep rising to keep health and longevity improving. Outlined here.

stuhlmann writes:

"An effective way to hold down health care spending would be for the government to only pay for the medical services that you would have obtained in 2000, so that services above and beyond that are not paid for. No new equipment. No new forms of specialist practice."

A possibly more desirable means of holding down health care spending growth would be a cap on government health care spending, perhaps per individual to give everyone an incentive to consume wisely. It would also allow individuals to make choices regarding their health, without presenting the taxpayers with an open-ended obligation. Unless we want to stop the increase in life span expectancy, why would we want a blanket prohibition on the government paying for new medical services? Some new type of equipment and specialist practice may be able to treat a given condition more cost effectively than the "old" form of treatment.

In general the use of new technologies results in reduced costs and improved services. Why do we not see this with health care? I'm no economist, but it looks like the system is broken. Why not radically reform the system, rather than just try to limit the damage it does? How about a market-based approach? How about removing barriers to competition? How about making more information available to consumers on the effectiveness of procedures and the effectiveness of service providers? If you think that instituting real health care reform would be politically difficult, then try telling an aging population that Medicare won't pay for any new drugs and procedures.

MikeP writes:

Unless we want to stop the increase in life span expectancy, why would we want a blanket prohibition on the government paying for new medical services?

Those people who are paying for their own health care or their own insurance would still be pushing the envelope here. It's only people whose health care gets paid for by the government who don't.

Why not radically reform the system, rather than just try to limit the damage it does? How about a market-based approach? How about removing barriers to competition? How about making more information available to consumers on the effectiveness of procedures and the effectiveness of service providers?

Limiting government-provided care for each condition to the cost of caring for that condition 25 years ago would be part of a grand bargain that would sweep away government involvement in health care and for the first time in a long time allow freer markets, freer competition, and freer consumer information.

The more health care that government pays for, the more restrictions that government places on markets, competition, and information. I seek a simple rule for a two-tier system precisely because it will free up most of the health care marketplace for the competition and innovation that is impossible with government highly invested in the system.

Lord writes:

I thought the stimulus did show it was difficult to increase spending because so much is mandatory and that was why so much was tax cuts. The main thing with spending is there is an objective desired to accomplish independent of cost. We don't say we want to spend $2T in Iraq and no more; we want to 'win' and spend whatever we believe reasonable and somewhat more. We don't say we want to spend $1T on healthcare but offer subsidies sufficient for everyone to obtain healthcare which is a moving target as more lose their jobs and costs rise. Dollarization is the cheap solution, but it is the cheap solution because it only establishes the minimum spending and assures that will be inadequate because costs rise to absorb that while providing as little as possible. The reason healthcare is utilization is because costs are set and any attempt to fix utilization would push back on costs. If you wish to return to 2000, just be sure to bring back all those jobs that no longer exist as well.

David C writes:

Comparing 2000 and 2010 is very selective. For most of the decade the President was the biggest supporter of government spending since Lyndon B Johnson. In 2010, we were in the middle of a large recession with a lot of stimulus money going out the door. Long term, the growth of government has been primarily due to government transfers, which are mostly mandatory. You're also using inflation, which grows the slowest, even though you could have used GDP or population instead.

Doc Merlin writes:

You misunderstand what mandatory and discretionary means.
Mandatory spending means that congress doesn't need to appropriate funds for it they already have in the past and those appropriations keep playing out every year.
Discretionary spending means that congress has to allocate funds for it occasionally for it to keep going.

It takes an act of congress to make any changes to mandatory spending and takes an act of congress to keep discretionary spending going.
This increases the difficulty in decreasing mandatory spending, because it requires a vote, wear-as just blocking a cut discretionary spending (so it can be done with a 41% minority in the senate).

JC writes:

I don't think health care costs are just a matter of utilization. I think lack of price competition has led to massive inefficiencies and overpricing. It's amazing how expensive care can be. I suspect it's way cheaper to get eye surgery or boobs, than similarly complex surgeries that are covered by health care plans or the govenment--and complexity isn't even a fair thing to hold constant because there is an incentive to reduce complexity for non-covered surgery.

Comments for this entry have been closed
Return to top