Arnold Kling  

The Political Economy of Spending Caps

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John Goodman writes,

On paper, ObamaCare cut Medicare's unfunded liability in half the minute Barack Obama signed the health reform bill. (A reduction of more than $53 trillion -- looking indefinitely into the future!) Going forward, Medicare will grow no faster than the economy as a whole. This means that Medicare spending will grow no faster than the payroll and income taxes that fund it. (No more increasing Medicare deficits!)

What makes this fiscal good fortune possible? According to Medicare's Office of the Actuary, Medicare payments to doctors and hospitals will fall further and further behind payments made by the private sector and other payers. In fact, by the end of this decade, Medicare payments will fall below Medicaid's. (Elderly patients will be less desirable than welfare mothers to the doctors who treat them!)

If we actually did this, what would it mean? According to Harvard health economist Joe Newhouse, senior citizens would be forced to get medical care from community health centers and safety-net hospitals -- just as many Medicaid patients do today. Those who can afford it will pay out-of-pocket for concierge services.

The projected path of health spending under Obamacare reminds me of the "business plans" that start-up companies hand out when they are trying to raise money from investors. Those power-point decks all come with a slide showing future revenues growing like a hockey stick. Typically, it's just a ludicrous fantasy scenario. As an investor, you feel like they must think you're an idiot if they expect you to believe it.

In the politics of government budgets, the concept of a "spending cap" is often trotted out. The idea is that instead of proposing a specific set of cuts, Congress will vote some overall cap. The thinking seems to be this:

1. Voting for specific cuts is difficult.

2. Voting for a spending cap is easier.

3. Once a spending cap is in place, the specific cuts will have to follow.

The doubt I have is whether step (3) actually operates as intended. More often and more likely, step (3) is the legislators find a way around the spending cap.

This criticism is not meant to apply (just) to the health care legislation. It applies to the use of this budget tactic by both parties, in many guises. There are plenty of wonks in libertarian circles who are big fans of general budget targets, spending limits, and whatnot. Not me. I'm from Missouri, and I say, show me how you actually going to eliminate and restructure programs.

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COMMENTS (3 to date)
Yancey Ward writes:

That is why be have special appropriations and off-budget budgets- to get around previous caps promised.

Jeremy, Alabama writes:

Boehner was asked recently, which specific programs he would cut. He said nothing in particular. The interviewer asked again, nothing, out of trillions? Nope, nothing stood out as worthy of mention. And this is from the team who drubbed the other guys by talking up cuts.

Tom Ault writes:

Given item (1) in the original post, and therefore any reductions in spending will take difficult negotiations both within Boehner's own party as well as Democrats in congress and the administration, it doesn't surprise me that Boehner won't commit to specific cuts. I'm going to reserve both my praise and my scorn for when they actually pass a budget.

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