David R. Henderson  

Henderson on Reinhardt on Goodman and Kotlikoff

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In a letter to the Wall Street Journal earlier this week, Princeton health economist Uwe Reinhardt criticizes an earlier op/ed by health economist John C. Goodman and economist Laurence J. Kotlikoff. It was an interesting enough response that I think it worthwhile to quote a large part of it and give my thoughts after each.

Reinhardt: In their lugubrious "Medicare by the Scary Numbers" (op-ed, June 25), economists John C. Goodman and Laurence J. Kotlikoff project estimated unfunded Medicare liabilities, literally to the end of time, and then relate the resulting staggering sum--somewhere between $43 trillion to $100 trillion, depending on the assumptions baked into the forecast--to this year's U.S. GDP.
Comparisons like that are basically meaningless, but if one wants to scare folks, perhaps they work.

Henderson: Yes, I'm sure the comparison is meant to scare "folks." That, of course, doesn't mean that the numbers are false. Why exactly are they meaningless? One might think it's because Goodman and Kotlikoff are comparing a stock--the present value of unfunded Medicare liabilities--to a flow--U.S. GDP. That would be a reasonable criticism although I would still find the numbers scary. But that's not the criticism Reinhardt makes.

Reinhardt: Every future generation of leaders running the country on behalf of its citizens must decide how to slice up their GDP among those who produced that GDP, those too young to do so and those too old to do so.

Henderson: Reinhardt clearly has a different view of government from mine. Notice that he thinks that "leaders," by which it's clear that he means "politicians," will be "running the country." This is common nowadays. I long for the day that many more people take to heart the ideals that many of us Americans will celebrate tomorrow--the ideal of having politicians run a limited government and not a country.
Notice also Reinhardt's idea that government "slices" up GDP.

Reinhardt: To illustrate, in 2003 Congress passed and President Bush signed the Medicare Prescription Drug, Improvement and Modernization Act which promised Medicare beneficiaries heavily subsidized prescription drugs, from 2006 on to kingdom come, without providing a penny of financing for that promise. The implied unfunded liability is a good part of the liability whereof the authors write.

Henderson: Good point. Where is he going with this?

Reinhardt: But as I tell my Princeton students, there is no reason why they or yet other future generations should feel bound by this reckless and morally dubious legislation.

Henderson: Good for you, Uwe. Note, though, that this is a strong statement. I wonder if he would make the same statement about other parts of Medicare that were unfunded.

Reinhardt: They can change it if they wish, and I hope they do. Most probably our current leaders will not.

Henderson: Reinhardt makes it sound as if a future government can say, "Hesto, presto, it's changed." He's not taking seriously the political constraints that keep even a bad program in existence. And yet he seems to be aware of the constraints. Otherwise, why does he think it probable, as do I, that our current "leaders" will not change it?


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COMMENTS (8 to date)
Tom West writes:

Well, my suspicion is that it will stop only when reality prevents it from continuing.

My guess is reality is when lenders panic and there's no more borrowing and taxes have risen about another 50% from current levels (from 26% GDP to 40%)

Uwe Reinhardt writes:

You identified correctly the problem with comparing the pv of unfunded Medicare liability until eternity with current GDP. It would be like comparing the unfunded retiree health plan liability of a corporation, projected to infinity, with its current revenues or profits, rather than with, say, networth.

But, of course, if it helps dramatize what one wants to dramatize, then economists (at least some of them) won't shrink from comparing stocks to flows.

Laws can be changed. Clinton and Gingrich dramatically changed our welfare law. Reagan with the help of a Democratic Congress drastically changed the tax law in 1986.

Ours is just an unusually spoiled generation that never really grew up. My hope is that the students I teach will do better.

Would I change Medicare to help reduce the current unfunded liability? Sure. But I would not worry about going out to infinity. I would just worry about the next 2 to 3 decades. Forecasts to infinity are simply nuts, as anyone who has ever been involved in making them knows.

Julien Couvreur writes:

It is scary to see the ideological progression from having a government that provides some basic services to a government that redistributes all of GDP.

Reinhardt does more than just ignore the reality of political inertia and entrenched interests, he ignores the wild uncertainty of relying of essential services and promises which can be reneged on a political whim. It's a really bad design to let "reckless and morally dubious legislation" pass now with the idea that it may get cancelled later.

In this world, your livelihood is at the mercy of politics.
Unless you are very fortunate, little or no amount of careful and responsible planning can get you out of such a trap (because of taxation and forced participation).

Tom Nagle writes:
"Every future generation of leaders running the country on behalf of its citizens must decide how to slice up their GDP among those who produced that GDP, those too young to do so and those too old to do so."
While libertarians will disagree with this on principle, even those who believe in redistribution should choke on this statement. Why should age be the criteria for redistribution? Many of those whose health care is heavily subsidized via Medicare are in fact much more wealthy than those who are paying for it with the Medicare tax on wages. And the aged are consuming without the normal "managed care" restraints that most working people must contend with when depending upon employer provided or independently acquired insurance. As a result, our system provides "care" to the elderly that is frequently ridiculously cost-ineffective, and sometimes even dangerous, simply so that the medical establishment can run up the bill. And note who the biggest defenders were of this redistribution during the health care debate: Republicans. God forbid that some "death panel" should decide that taxpayers will not pay for a hip replacement or chemo for someone with advanced dementia.
...the problem with comparing the pv of unfunded Medicare liability until eternity with current GDP. It would be like comparing the unfunded retiree health plan liability of a corporation, projected to infinity, with its current revenues or profits, rather than with, say, networth.
Speaking of missing the point, what would CURRENT net worth have to do with future liabilities? Wouldn't you want to have some idea of what FUTURE revenues and profits would be?

Not to mention that the government doesn't 'own' 100% of GDP, it can use only a fraction of it to pay for citizens' health care (including prescription drugs). From a knowledge of current GDP though, we can project future GDP and what percentage of that future GDP would be available to pay for those liabilities when they come due.

In fact, I seem to remember Kotlikoff writing about that.

Brent writes:

Why is it meaningless? It clearly shows that an ever increasing, and perhaps impossible portion of GDP, will need to be used to fund these programs.

Chris Koresko writes:

Clipped from the Medicare Trustees report, via this article:

“To put this very large figure in perspective, it would represent 4.3 percent of the present value of projected GDP over the same period ($907 trillion)".

Here "it" refers to the unfunded liability over a 75-year period. The report also says there is “a significant likelihood” that the “projected HI and SMI expenditures are substantially understated as a result of potentially impracticable elements of current law," which I suspect is a reference to ObamaCare.

So 4.3% of GDP over a 75-year run, on top of the taxes that would be collected under current law. That's something like 20% of Federal revenue (which has over recent decades stayed close to 20% of GDP). Sounds scary to me!

jonpez2 writes:

"Don't look at this number, it's scaring you unnecessarily. One reason not to find it scary is that future politicians will find it so scary that they'll change it." Eh? Does that mean that in five years (or whatever) Mr Reinhart will say "Hey, this number's scary! We should change it!"

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