Matt Yglesias

Voters Reject Anti-Government TABOR Proposals in Maine and Washington

An excellent point from Kristina Wilfore who observes that if you want a decent test of the “tea party” movement you could do worse than to look at TABOR proposals that would put arbitrary caps on state government spending and force meaningful reductions in the size of government. Two such proposals were on the ballot last night in Washington and Maine and they lost:

A central tenant of the right-wing agenda has been rejected with the defeat of TABOR (known deceptively as the “taxpayer bill of rights”) in these two states – states that are diverse from each other in almost all respects. Maine’s measure went down with a resounding defeat, 60% to 40%, while Washington’s campaign came from behind with a 55% to 45% rebuff.

A few weeks ago, conservative columnist and tea party champion John Fund wrote in the WSJ that: “If voters in Maine or Washington state pass a taxpayer bill of rights, it will be a clear sign that even in blue states the public is coming to believe that government spending is out of control and that elected officials can no longer be trusted to rein it in. That’s a message that will likely reverberate in Congress regardless of who wins in the New Jersey and Virginia gubernatorial races.”

Iris Lav from the Center on Budget and Policy Priorities notes that “by rejecting TABOR, officially Question 4 in Maine and I-1033 in Washington, voters have helped these states preserve needed public services and improve the business climate.”

It’s also worth emphasizing that the reason radical budget-cutters have started turning to TABOR ballot initiatives to get their way is that even politicians who like to talk about cutting government in the abstract don’t actually want to take responsibility for specific cuts. That’s why Bob McDonnell made sure to stay nice and vague about what he’ll actually do once he takes over in Virginia.

Markets Really Do Convey What Market Participants Think

Paul Krugman on an underdiscussed point:

And right now, deficit-phobia has quickly congealed into the latest CW. You can see it in editorials (not from the Times, I’m happy to say, but almost everywhere else), in what the talking heads say, even in supposedly objective news reporting. Not a day goes by without my reading some assertion that “markets are anxious/jittery/worried about the deficit” — an assertion based on no evidence whatsoever. (Long-term interest rates on US debt are near historic lows; CDS spreads show no concern about default.)

It’s really maddening that at the same time preposterous idea like strong forms of the Efficient Markets Hypothesis continue to be respectable that people seem unwilling to trust financial markets to accurately convey the beliefs of participants in financial markets. I would add to Krugman’s observations the fact that we have Cato’s Chris Edwards blaming anticipating inflation for the lack of private investment when the TIPS spread shows that markets aren’t anticipating inflation.

Right now economic conditions are bad. And the budget deficit is high. So I find it understandable if the man on the street chooses to conclude that the budget deficit is causing or contributing to the bad economic situation. But people writing about these matters ought to know better—interest rates are low and markets are assessing both default risk and inflation risk as low. So what about the deficit is supposed to be causing the problem? Meanwhile, to repeat myself the wise elected official is going to spend less time worrying about what voters think is to blame for the economic situation than he does on fixing the bad economic situation. Results matter more than folk theories.

Estate Tax Cuts and Deficit Hawk Hypocrites

One good way to tell the difference between a member of congress who’s genuinely concerned about the long-term budget deficit and a hypocritical jackass is to ask them where they stand on the Kyl-Lincoln $250 billion budget-busting giveaway to the children of extremely rich people. The bill now has a House counterpart. Key sponsors include Rep Artur Davis (D-AL) and Rep Shelley Berkley (D-NV).

Health Care and the Long-Run Budget Deficit

The CBPP did an interesting analysis of the long-term budget deficit issue yesterday that reformulated the familiar point about health care costs and deficits by observing that there’s a revenue-side impact here too:

Long-term spending projections. After 2019, we extrapolate components of the federal budget based on the growth rates estimated in CBO’s June 2009 report. We adopt CBO’s rate of growth for Social Security spending in our projections. Our projections of Medicare and Medicaid spending assume that each program will grow at the rate CBO assumes for the two programs combined.

We assume that all other spending will grow at the rate of inflation and population growth combined, meaning that it will gradually shrink as a percentage of GDP.

Long-term revenue projections. Our revenue projections largely follow CBO’s alternative fiscal scenario, which assumes extension both of the 2001 and 2003 individual income tax cuts and of AMT relief. In addition, our numbers — like CBO’s — assume a decrease in revenues due to increased private health care spending: as health care costs rise, workers are likely to receive more of their compensation in the form of tax-exempt health care benefits and less in the form of taxable wages, so total revenues decline. But because we project that excess cost growth in other health-care spending will mimic that in Medicare and Medicaid, whereas CBO estimates it will be somewhat lower than in those programs, our revenue estimates are lower than CBO’s.

Thinking about the long-run deficit you can really abstract away from all the present political controversies and just focus on two facts. One is that the US has an existing commitment to provide generous comprehensive health care to all senior citizens. The other is that health care costs are rising faster than GDP. That means that unless we’re prepared to violate that commitment (which it seems to me we aren’t) we need to prepare ourselves for taxes to steadily increase as a percent of GDP (which it seems to me we also aren’t). The broad “center” of the political spectrum, ranging from the leaders of both parties, is stuck in the middle of this pincers movement. You have left-wing and right-wing versions of ideas about how to slow the growth in health care spending, but I’ve never seen a credible argument that any of these things can actually slow health care growth to less than the rate of GDP growth.

Note that some sectors or other have to grow faster than GDP. The mere fact that something is doesn’t show that anything has “gone wrong.” We just happen to have substantially assigned one such category to the public sector; and we’ve so assigned to to an even greater degree than most people realize via implicit tax subsidies.

Doing it With Tax Increases

Writing for CAP, Michael Ettlinger and Michael Linden say that achieved a balanced budget by 2014 solely through higher taxes “is not a likely or necessarily desirable policy.” Still, as they say it’s certainly a feasible policy:

Much is said about the economic effect of tax increases, but it is worth noting that there is little risk of the United States becoming economically disadvantaged relative to other advanced economic nations by raising its aggregate tax levels. We have the fifth lowest taxes as a share of GDP among economically developed nations (counting all federal, state, and local taxes). If we raised taxes in aggregate to a level that would safely balance the budget, the United States would still be in the bottom 10 out of 30.

Obviously that’s not a politically kosher solution. But on the merits I think the case for doing this almost entirely through tax side measures is pretty strong. Higher taxes on the scale under consideration would simply leave the United States with the kind of tax levels found in Australia and Canada, exactly the kind of countries you would expect to be similar to America.

The larger issue is that no matter what happens in 2014 as long as the US is committed to providing health care to senior citizens and the cost of health care grows faster than GDP, over the long run taxes as a percent of GDP will need to consistently rise. And as far as I can tell Republicans aren’t prepared to break that commitment to providing health care to senior citizens and Democrats aren’t prepared to back continually higher taxes. Across some margin of time you can fudge this by messing with defense and domestic discretionary spending but ultimately the choice will have to be made.

Defense and the Long-Term Budget Outlook

Paul Krugman writes about the long term deficit:

What I read from this is that between the slightly unsustainable deficit in 2019 and the demography to follow, we’ll eventually have to find 3.5% — call it 4 — in fiscal consolidation even if health reform ends excess cost growth.

That’s a big but not disastrous number. We could raise that much in taxes alone without inflicting huge economic damage. We could make up some of the number if health reform does more than end excess cost growth, and rolls spending as a percent of GDP part way back toward European levels. We could cut Social Security benefits — although if you look at the numbers, it would take draconian cuts to make a major dent that way.

Actually reducing health spending as a percent of GDP strikes me as very unlikely to happen. The politics of just getting cost growth under control are very difficult. But one thing I’m surprised Krugman didn’t mention is the Department of Defense. The Pentagon’s budget has, in percent of GDP terms, varied a lot over the years:

The Heritage Foundation purports to think it’s strange that defense spending is lower (as a percent of GDP) than during its Cold War averages “despite the War on Terror.” One might respond to this by trying to compare the budget of al-Qaeda to the budget of the Soviet Union. For that matter, you could try to compare the budget of al-Qaeda to the budget of Czechoslovakia or East Germany or whatever other random Warsaw Pact member you choose.

Maintaining a level of defense spending well above anything that seems to meet a strict self-defense test has a lot of advantages for the country. But those are advantages that need to be weighed against the costs in terms of higher taxes or lower spending on things like Social Security.

Our Crazy Electorate

Steve Benen observes that according to the latest NBC/WSJ poll voters are weirdly averse to budget deficits:

Which of the following two statements comes closer to your point of view?

Statement A: The President and the Congress should worry more about boosting the economy even though it may mean larger budget deficits now and in the future.

Statement B: The President and the Congress should worry more about keeping the budget deficit down, even though it may mean it will take longer for the economy to recover.

Thinking about it rationally, the reason to worry about large deficits is that they can impede economic growth. That makes it generally worthwhile to try to run balanced budgets over the course of the business cycle. But under circumstances when running a larger deficit doesn’t hurt growth, there’s no real reason to try to avoid deficits. It’s not like the Gods of budgetary balance have some other way to punish countries for large deficits other than reduced growth.

I assume the real issue here is that many people are explicitly rejecting the premise of the question and just think that deficit spending aimed at boosting the economy won’t actually boost the economy. They’re wrong about that, but lots of folks are out they saying fiscal policy can’t boost growth so it shouldn’t be shocking that some people believe them.

The Irving Kristol Legacy

When a major figure from the other ideological camp dies, I think the common thing to do is to praise the dead guy and disparage his modern-day co-ideologues by comparison. But as Brad DeLong points out, Irving Kristol’s own account of his role in popularizing nutjob anti-tax politics is sufficiently damning that I don’t think that strategy will really fly:

Among the core social scientists around The Public Interest there were no economists…. This explains my own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority – so political effectiveness was the priority, not the accounting deficiencies of government…

The presence of a major ideological movement in the United States of America dedicated to the dual propositions that taxes must never go up, and that government expenditures don’t need to relate to government revenue in any real way as long as the Republican Party is in charge simply makes it almost impossible for the country to be governed in a responsible manner. If we had a different political system, it’s possible that such an ideological movement would marginalize itself, lose elections, and the other guys would run the show responsibly. Maybe. You could at least imagine it happening. But in our system even a defeated minority gets a ton of influence over policy and becoming completely dogmatic and irrational actually enhances that level of influence.

Fiscal Responsibility

Back in April, Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AR) proposed an amendment that would deliver a $250 billion cut in the estate tax. This was described as an effort to help farmers and small businessmen, but in reality “only 0.2 percent of the proposal’s cost, relative to the cost of making 2009 law permanent, would go to tax cuts for small business and farm estates.” The other 99.8 percent of the cost, about $249.5 billion dollars, was aimed at inheritors of estates worth over seven million dollars.

Bayh's Looking Out for Her!

The proposal passed, with Evan Bayh (D-IN) as one of those taking the view that the best way to handle the country’s long-term budget situation was to cut taxes on multimillionaires.

Coincidentally, there’s an op-ed in today’s Wall Street Journal by Senator Evan Bayh making the case that deficit reduction is super important and Democrats need to start learning to restrain their hunger for new spending. You can tell that the argument is offered in 100 percent good faith, because everyone knows that when you want to launch a serious conversation inside the progressive family the WSJ editorial page is the place to be. It’s a venue with an unparalleled credibility on the left.

Kent Conrad Erecting New Procedural Hurdles to Health Reform

Budget master Kent Conrad

This is a bit in the weeds, but you should go read Ryan Grim’s story about Kent Conrad directing the CBO to score health care reform in a 20-year budget window rather than the usual ten. This will tend to make the score less accurate, since projections get more and more uncertain the further you go out. It will also make it harder to pass a health care bill. But it will disadvantage the more-liberal House bill more than it disadvantages the Senate bill. And I think it’s usually best to assume that members engage in these kind of procedural moves because they understand their impact—Conrad is trying to kneecap the liberal version of health reform, and considers making it harder to pass any kind of health reform an acceptable price to pay to meet that goal.

Officially, though, we’re just supposed to think that Conrad really, really hates budget deficits. But as Ezra Klein notes, Conrad’s record doesn’t totally support that:

The first came earlier this year when Conrad modified Obama’s first budget. Obama had eliminated a couple of Bush-era gimmicks that made the deficit appear smaller than it really was. Bush, for instance, shortened the budget window from 10 years to five, so the total deficit sounded smaller. Obama’s budget returned it to the traditional 10. And then Conrad changed it back. The Politico reported that Conrad made this decision “because of the uncertainty of long-range forecasts.” Others thought he did it to hide the size of the deficit. In any case, 10 years, as the alert reader will notice, is less than 20 years. If 10 years was too long a time period for certainty, then it is difficult to see how 20 years could possibly be acceptable.

The second came in 2003, when Conrad voted for the Medicare Modernization Act, better known as Medicare Part D. The Congressional Budget Office estimated that the bill would increase the federal deficit by $421 billion and reduce federal revenue by another $174 billion. The total cost to the deficit, then, neared $600 billion. Conrad not only accepted the CBO’s 10-year time frame, but he voted for the bill. His press release enthusiastically touted the fact that the bill would “bring more than $70 million to North Dakota hospitals over the next ten years.”

Conrad’s record in the Senate, then, would lead you to believe a couple of things. For one, he distrusts long-range projections. Even 10 years is too uncertain. He also believes some priorities overwhelm deficit concerns, health-care coverage being one of them. But when faced with a health-care reform that will be deficit neutral within the 10-year time frame, he is demanding that it instead be measured against an even more uncertain 20-year time frame, and by an agency that he claims underestimates savings. The CBO’s scores are terrible, in other words, and come in such small portions!

To be fair to Conrad, the vast majority of soi disant “deficit hawks” on the Hill are huge hypocrites, much worse than Conrad. Conrad didn’t vote for the 2001 Bush tax cut, the invasion of Iraq, the 2003 tax cut, or the Kyl-Lincoln estate tax cut all of which attracted Democratic support, typically from the kind of members who complain about deficits. So in the scheme of things, he really is a committed deficit hawk. Still, per Ezra’s post there’s still lots of wiggle-room in this commitment, and the latest twist makes very little sense on the merits.

Note that the theory that the CBO underestimates the cost savings in health reform isn’t just some nutty theory. Among others, the Institute of Medicine agrees. I think there are sound reasons for the CBO to be conservative in its approach, but we should keep in mind the fact that the CBO’s approach is deliberately designed to be conservative.

Financial Mutually Assured Destruction

Noam Scheiber has a fascinating article on Chinese worries about the U.S. budget deficit and American policymakers’ efforts to calm those fears. The piece doesn’t really point to a hard-and-fast conclusion about how to resolve the situation and that’s more or less the problem:

The day China consumes more, relies less on exports, and accumulates far fewer dollars as a result can’t come soon enough. There’s a certain mutually-assured-destruction quality to our current relationship–Larry Summers calls it the “balance of financial terror”–in which one false move by either side could bring down both economies, and probably the entire global financial system, too. This makes dialogue a necessity. But what it really does is make you pine for a way back from the edge.

As The Atlantic’s James Fallows has pointed out, even if both sides behave responsibly, there’s the persistent risk of miscalculation–or maybe a rumor that triggers a bond market sell-off China didn’t intend. During the cold war, the hotline Kennedy and Khrushchev established was genuinely stabilizing, but it would have been far more stabilizing had the United States and Soviet Union stopped training thousands of nuclear warheads at one another. If, to stick with the analogy, the U.S.­-China relationship is only in the early 1960s, then it’s going to be a long couple of decades indeed.

It strikes me that any rational person looking at how the health care debate has unfolded is going to grow substantially more skeptical about the ability of the United States to pass major legislation in general. What’s more, if you contrast the health care situation with the relative ease with which it was possible to enact debt-financed tax cuts (in 2001 and 2003) and a debt-financed increase in Medicare spending (in 2003) you’re not going to get super-optimistic about the prospects of deficit reducing legislation passing in the future.

Grassley Claims Large Deficit Compels Him to Embrace Budget-Busting Status Quo

Senator Chuck Grassley continues to cast about for pretexts to spike health reform and please his party leadership so he’s hit upon an unusually nonsensical reason:

Senator Charles Grassley of Iowa, one of three Senate Republicans negotiating on health care, said the soaring federal budget deficit “puts a stake in the heart” of $1 trillion measures being debated in Congress.

Obviously, the scope of the budget deficit in 2009 and 2010 has nothing to do with how the health care system ought to look in 2013 when the bills under consideration phase in. If the bills are affordable in 2013, then they’re affordable in 2013 regardless of current deficits. And if they’re not affordable, then small current deficits wouldn’t change that either. But more to the point, as the administration was emphasizing before Grassley’s “death panel” demogoguery helped scare them off the point, health care reform is integral to getting the long-run budget deficit under control:

Whatever you think of the current budget predictions, nothing about sticking with the status quo makes things better.

The Need for Higher Taxes

I like this version of the CBO’s fiscal outlook chart that has the light blue horizontal line showing the average level of revenue in the 1968-2008 period:

What we see here is that the current budget outline has revenues rising, slowly, to a level somewhat below its average level during the 40 year conservative ascendancy. But in the future, the country is going to undergo demographic shifts that imply higher spending, and progressives are hoping that the conservative ascendancy is now over. But clearly a period of progressive ascendancy—especially when combined with demographic realities—implies that revenues ought to be higher, not lower, than their average level from the conservative period.

In other words, progressives are going to need to start thinking about ways to raise taxes in the not-so-distant future.

The Sources of the Budget Deficit

Two key political points on the recent deficit numbers. One, per Michael Ettlinger and Michael Linden, is that this is primarily about Bush legacy policies and the economic downturn rather than the results of any new post-election initiatives:

We’re not just seeing here that Bush’s policies were irresponsible, but an illustration of what was so irresponsible about them. When a giant recession comes, you wind up running large deficits. Then you need to pare back afterwards and start reducing your debt-GDP ratio. And it’s really unhelpful to heard into that situation with a pre-existing large debt overhang.

The other point is what Tim Fernholz says here—large looming structural deficits are a reason to start reforming the health care system ASAP not a reason to delay action. It’s very fair to say that the proposals on the table in congress don’t go as far as would be ideal in terms of changing the long-term cost equation. But that’s a reason to put additional constructive ideas on the table and open up political space for bolder action. Stalling the legislative process—and ultimately hoping to derail it—will only make things worse.

It’s Easy to Avoid Tough Choices

Stan Collender tells Ezra Klein that he thinks next year it’ll be necessary to propose tough measures to put us back on the path to deficit reduction:

First, the Democrats with the most difficult reelection battles are the freshmen elected in Republican-leaning, fiscally conservative districts. They’ll need something to show for their time in Washington, and along with the Blue Dogs, they may well be able to get it.

Second, and arguably more importantly, the markets are increasingly nervous about the size of our long-term deficits, and without credible action to reduce them, interest rates could rise, choking off the recovery. That would be the worst possible outcome for the administration, as nothing will be as politically potent as tangible evidence of recovery, and nothing will be as damaging as a return to recession. As Collender sums it up, “proposing difficult reductions next year will be difficult and dangerous. But so will not doing them.”

That first point is, I think, almost certainly wrong. If you recall what happened with the FY2010 budget, what happened is that the Obama administration proposed a budget that (a) dispensed with some Bush-era accounting gimmicks, and (b) left medium-term deficits at the outer bounds of sustainability. Centrist Democrats, being somewhat electorally vulnerable and enjoying the politics of deficit reduction, complained about this and swore they’d produce something better. But what they did, in practice, was make the deficit bigger by striking out some tax increases and then make the deficit seem smaller by putting some of the accounting gimmicks back in. Ta-da!

Which is just to say that the politics of deficit reduction are different from actual deficit reduction. Back in 1993 among wonks it was centrists who were most eager to see Bill Clinton prioritize deficit reduction. But that meant putting forward a “tough choices” budget. And centrist politicians are incredibly averse to voting “yes” on unpopular measures, so lots of center- to center-right Democrats wound up joining with the GOP in voting “no” on exactly the sort of balanced deficit reduction package that they notionally would favor.

The bond market issue is another matter.

Guide to the Mid-Session Budget Review

Exciting! Well, actually, if that doesn’t sound exciting note that according to the Center on Budget and Policy Priorities’ James Horman it’s actually even less exciting than you might thing. Next week OMB and CBO will release new deficit estimates and people will try to argue a lot of points based on them. But in fact:

1. Both reports will undoubtedly show that this year’s deficit will be the largest since the end of World War II, relative to the size of the economy. This is no surprise.

2. There will be no simple answer to the question of whether the new projections are bigger or smaller than was expected earlier this year.

3. Whether the new estimates exceed the highest previous estimate for the year will likely depend on the amounts recorded for a particularly volatile category of spending: assistance to troubled financial institutions.

4. The new projections won’t provide any evidence about whether the stimulus legislation is working or whether Congress and the President should continue to pursue health care reform.

5. The only clear conclusion that should be drawn from the new deficit estimates is the continued need for action on long-term deficits.

How to deal with long-term deficits is, of course, complicated and controversial. And yet it’s also in a way quite simple. We need to reform health care to slow the cost growth of Medicare and Medicaid. We need to steadily reduce defense spending as a share of GDP. We need higher taxes. And we need to reform the tax code to make it more efficient so that the higher taxes are economically viable. Given continued economic growth, future Americans will enjoy both more public services and more private consumption than current Americans. The politics, of course, is a different and more difficult matter.

Fun With Budget Windows

I guess because it sounds good, Barack Obama has promised to make health care reform “deficit neutral.” But as David Leonhardt explains, that doesn’t necessarily mean what you might think it would mean:

First, a little background: Congressional bills are typically based on a 10-year budget time frame. The Congressional Budget Office looks at the cost of the bill over the next 10 years (new spending and tax cuts) and the revenue it raises (spending cuts and tax increases). The difference between those two determines whether the bill adds to the deficit, reduces it or is “deficit neutral.”

This is a fundamentally arbitrary standard to meet, and policies with all kinds of different budget implications can meet the standard. To illustrate, the following is an example of a hypothetical initiative that scores as deficit neutral:

This, by contrast, scores as causing a deficit:

In the real world, of course, the second program leaves the country with a very small and manageable deficit. Something that it would be nice to fix, but could also be fixed easily. The first program, by contrast, actually implies a giant long-term deficit. You’ve picked a revenue source that’s totally inappropriate to the anticipated growth in costs. Or maybe you’ve designed a program whose cost growth is totally out of proportion to the among of money you’re prepared to spend on it. It just looks neutral because of the way the “window” works.

Fixing the State Budget Problem

State Capitol dome, August, ME (cc photo by J Stephen Conn)

A big part of what’s so frustrating about the various crises facing state budgets at the moment is that it’s all so simple and predictable. Everyone knows that there’s a business cycle. And when the business cycle is up, demand on social welfare services goes down and tax revenue goes up. This generates budget surpluses. Then state elected officials forget what happened last recession, and enact a combination of spending hikes and tax cuts. Then credulous journalists forget what happened last recession, and write a series of articles lauding a new generation of pragmatic governors who managed to put partisanship aside and cut taxes while boosting spending on the schools. Then comes a recession, revenues go down, welfare obligations go up, and we’re in a budget crisis.

And then a bunch of scolds lash out at the irresponsible budgeting habits of elected officials. The fact of the matter, however, is that the institutional and electoral incentives simply force this outcome.

It seems, however, that the problem is amenable to a solution. Congress could set some percentage of total state expenditures that need to be put in the State Budget Escrow Fund. Then in case of recession, an act of Congress (or if you prefer, an act of the independent State Fiscal Policy Commission) could release the funds to the states. That wouldn’t perfectly smooth out the curve, but it’d be leaps and bounds better than the status quo. And I don’t see any good ideological objection from the left or from the right. On the other hand, I suppose this might be unconstitutional.

Medicaid and Health Reform

Stuck with the tab? (NGA photo)

Kevin Sack and Robert Pear reporting for the New York Times raise a non-crazy worry about the health reform legislation before the congress, gubernatorial concerns that Medicaid expansion will wreak devastation on state budgets. My go-to guy on Medicaid issues says the House bill handles this concern fairly well, but that the Senate legislation is less clear. And certainly when you become very concerned with slightly arbitrary metrics like CBO scores across a 10-year window rather than with overall fiscal responsibility, it creates incentives to craft legislation that shunts costs onto the states thus “hiding” them from the prying eyes of the scorekeepers.

To the best of my knowledge, the large state role in Medicaid is extremely ill-advised. In general in the United States you get better “quality of government” at the federal than at the state level. And in macroeconomic terms, state Medicaid responsibilities tend to work as “automatic destabilizers,” increasing burdens on state government just when the states can’t afford to spend money. In an ideal world, you’d see a much larger federal role in Medicaid and this would reduce the severity of recessions and in general reduce the need for contentious debates about stimulus bills. You’d also almost certainly get better health care coverage for poor people in most of the country.

But even though switching the financial responsibility from the state to the federal level wouldn’t involve any net change in the tax burden or the size of the public sector, it would “look like” a big increase in taxes and spending. So that’s obviously off the table for now. But something to keep an eye on during the health reform debate is that while Medicaid expansion is good, mandated increases in state-level Medicaid expenditures are pretty questionable policy. Better to have the federal government pick up the bulk of the tab for expansions.

Situational Love for the CBO

Hero of conservatism, destroyer of budgetary balance.

Sam Stein has a very good item on the right’s situational affection for Congressional Budget Office scores:

When the CBO predicted in 2004 that Bush’s new tax and spending proposals would produce deficits of $2.75 trillion over ten years, a spokesman for the White House Office of Management and Budget declared that ”even CBO would admit we don’t honestly know what these numbers will look like 10 years from now.”

That same year, the Bush administration pushed forward with its plans for Medicare Part D despite the fact that its internal cost estimates were $139 billion more than those offered by the CBO. Republicans on the House Ways and Means Committee had worked diligently to defeat the attempts of their Democratic colleagues to make those estimates public.

In a similar vein, conservatives were beside themselves when the CBO refused to run the 2004 Bush tax cuts through various economic models to see if the government could, in the end, make money by stimulating spending. Rather, the CBO used a “static” method and found $1.2 trillion worth of deficits through the next decade. Republicans, naturally, largely ignored the findings.

Keep that in mind when you hear Republicans saying that the CBO estimates of the House health care bill ought to deal them some kind of death blow. The larger issue, however, isn’t situational love for the CBO so much as it is situational regard for budgetary balance. When Republicans ran the show they gleefully put wars, tax cuts, Pentagon budget increases, and even Medicare expansion on the national credit card.

That said, annoying as conservative hypocrisy on this score is, it doesn’t burn me nearly as much as “centrist” hypocrisy does. When you see a moderate Democrat who didn’t mind voting for the Bush tax cuts—Ben Nelson or Max Baucus say—now worrying that the country doesn’t have the money to make health care affordable, then you really need to wonder where their priorities are.

Healthier Lifestyles Now Looking Budget Healthy

An apple a day keeps the doctor away, but what does it do to the budget deficit?

There’s been some long-running debate in the community over whether or not having people adopt healthy lifestyles would actually reduce health care costs as opposed to just making people healthier. After all, getting crushed by a an anvil at age 45 is terrible for your life expectancy, but not particularly costly compared to letting you live 20 more years before getting a cancer diagnosis. But via Ezra Klein and Tom Laskaway some indication that the research on obesity is now looking to indicate that it will save money:

Health economists once made the harsh financial calculation that the obese would save money by dying sooner. But more recent research instead suggests that better treatments are keeping them alive nearly as long – but they’re much sicker for longer, requiring such costly interventions as knee replacements and diabetes care and dialysis. Medicare spends anywhere from $1,400 to $6,000 more annually on health care for an obese senior than for the non-obese, Levi said.

This is basically good news, since the sort of measures that could create more opportunities for healthy diet and exercise habits are themselves relatively cheap compared to the delivery of health care services. But it’s long been a bit unclear as to whether or not cost-effective measures along those lines would actually pay for themselves in terms of reduced medical costs down the road. Insofar as that does seem to be the case, it further strengthens the argument that we can afford to build a healthier society. I don’t actually think it makes a ton of sense to argue that we should promote wellness in order to save money. Rather, we should promote wellness in order to produce healthier, longer-lived, happier people. But if such measures are cost-negative, that strengthens the case for taking the necessary steps.

Deficits and the Midterms

Edward Luce of the FT writes that Barack Obama should pay more attention to the long-term structural deficit:

A plausible alternative scenario is that Mr Obama will head into next year’s midterm congressional elections, which will help determine his re-election chances in 2012, facing a sullen electorate that fears the Democrats are taking their country towards bankruptcy. It might not be fair – Mr Bush, rather than Mr Obama, deserves most of the blame for America’s deepening structural deficits. But it is the kind of message that could help bring a moribund Republican party back to life.

If this strikes me as somewhat politically naive. For one thing, there’s no reason to think that the midterms “will help determine” Obama’s re-election chances. Note the divergent outcomes in 1994 and 1996, or in 1982 and 1984. If anything, it’s arguably easier for a president to play off an opposition-dominated congress. Meanwhile, the basic geography of the 2010 Senate midterms is very favorable to the Democrats, with open GOP-help seats in New Hampshire, Missouri, and Ohio.

Last, I think there’s just common sense. With the common bad and getting worse and long-term deficit projections looking grim, sure voters say they’re upset about the deficit. But if by the fall of 2010 unemployment is lower than it is today and heading downward, how worried are people really going to be? By contrast, if things keep getting worse, how impressed will they be by an improvement in the projected state of things in 2024? Something’s going to have to be done in the 2011-2014 period to make this graph look different but doing climate and health (which is related) in 2009-10 looks substantively and politically justifiable to me.

The Limited Relevance of PAYGO

I was checking out some expert testimony on proposals to re-adopt the so-called “statutory ‘pay-as-you-go’ rule” requiring tax cuts or spending increases to have specific offsets (see Alice Rivlin here), but I wound up finding this point from Robert Greenstein to be the most compelling:

While budget rules, such as the pay-as-you-go rule, can be important, actual policy decisions that will be made in the next few months will be far more important in demonstrating a real commitment to begin dealing with the long-term fiscal problem. In particular, the decisions that are made about health reform will be crucial. Whether a statutory pay-as-you-go rule is enacted or not, it is essential for the Congress and the President to demonstrate a commitment to the pay-as-you-go principle by fully paying for the cost of health care reform over the next 10 years. That will require some painful steps, such as adopting politically unpopular changes both in tax laws and in payments to health care providers. But if Congress and the President do not demonstrate that they are willing to take such steps to keep from making an already unsustainable fiscal situation worse, the enactment of a statutory pay-as-you-go rule will ring hollow and will not persuade anyone (including financial markets) that policymakers are willing to deal in a real way with the problems we face. In addition, it is absolutely crucial that the health reform that is enacted produces changes in our health system that begin taking the steps necessary to slow the growth of health care costs systemwide (i.e., in both the public and private sectors). We will never be able to ensure sustainability of the federal budget — or the health of the economy — unless we bring down the growth rate of those costs.

Something that pure budget analysis doesn’t get at on this subject is just the pure politics of it. A lot of people look around and see a world in which we had PAYGO rules in the 1990s and we declining budget deficits and then a small surplus. Then we had a Republican President and suddenly hugely expensive tax cuts—tax cuts that all Republicans and many Democrats voted for—didn’t need to be paid for. We also had a hugely expensive war that all Republicans and many Democrats voted for that didn’t need to be paid for. And PAYGO rules were suspended. Now there are progressive majorities and PAYGO is magically coming back. And aspirations for universal health care are being constrained by the need to pay.

Now, I think it’s a good thing that the administration has committed to pay for its health care proposals. But ultimately it takes two to tango here. And somehow we’ve gotten into a dynamic where not only Republicans, but also a certain number of moderate Democrats, seem to believe that conservative ideas don’t need to be paid for but progressive ideas do. That’s not a sustainable situation.

Tax Increases Are In Your Future

In addition to its “current law” scenario, the Congressional Budget Office’s Long-Term Budget Outlook document also considers an “alternative fiscal scenario” in which certain accounting gimmicks suck as pretending that congress won’t continue passing AMT patches and rejiggering Medicare reimbursement rates are dispensed with. The results for the medium-term look like this:

Note that the much-debated stimulus and bailouts and such don’t really have anything to do with the problem here. And also note that while the increasing unsustainability of the fiscal picture is primarily driven by cost growth in Medicare and Medicaid that’s not the whole story. In addition to all that, Barack Obama’s current budget would fix the level of revenue at a smaller share of GDP than where it was during the late 1990s. And it would do this during a period of time when population aging are making Social Security and Medicare more expensive over-and-above health care cost growth. Meanwhile, even at its “bend the curviest,” the administration doesn’t claim it will be able to get cost growth down to zero. And progressives have—or at least my understanding is that we have—an agenda that also involves spending more money on things like schools and transportation and fighting poverty and so forth.

Some of the gap can and should be made up with by reducing the share of GDP currently dedicated to defense. And tax increases should be avoided over the short-term as we cope with a severe recession. But pretty soon taxes will need to be higher than what this chart lays out.

Barack Obama, Deficit-Slayer

The Last Laugh

There’s a lot of political concern in Washington about public anxiety about budget deficits. Substantively, the public’s concerns don’t really make sense, as deficit-reduction amidst a severe recession will only make the recession more severe. But Stan Collender, whose deficit hawk credentials should not be in question, observes that the political problem is largely a mirage as well:

If you look beyond the very short-term, the deficit situation will begin to turnaround next year, that is, before the election. Under current forecasts, the deficit will fall by a record amount from 2009 to 2010. It will still be high by virtually anyone’s standards — probably around $1 trillion or so. But the big change in the right direction will give the White House the breathing room it needs and alter the politics substantially. Anyone want to bet that there will be a cover story somewhere next year calling Obama the deficit killer?

This will, of course, not be a substantive fix for anything. But the nominal deficit reduction will, indeed, be huge. As the economy recovers, tax revenues will rise, social safety net outlays will fall, and stimulus measures will begin to tamp down. If we can assume further growth in 2011, the complete expiry of Recovery Act provisions, and the winding down of the Iraq War, that’ll be further deficit reduction. On the merits, people would still do well to be concerned about the deficit further out when, in the absence of structural reform of the health care sector, Medicare costs will bury us all. But in the short term, things are going to look worse than they really are in 2009 and then look better than they really are in 2010. And of course people vote in the even-numbered years.