Posted by Jeffrey Brown on Apr 18, 2012
Filed Under (Health Care, Retirement Policy, U.S. Fiscal Policy)
A war of words (and numbers) has broken out in the policy wonk world over the effect of Obamacare on the deficit. It is important, entertaining, and confusing. This blog attempts to bring a bit of clarity to the debate.
It began last week with an article, written by Charles Blahous and issued by the Mercatus Center, that argued that Obamacare increased the deficit. The piece was discussed in the Washington Post (and on my blog) on the day it was issued.
It took almost no time at all for Paul Krugman to denounce the study. He first began, in typically unfortunate fashion, by attacking the credibility of the author through a suggestion that Blahous was just another Koch-funded crazy who should not be believed. He then went on to make a slightly more substantive argument about the fact that Blahous’ result rested upon a view (that Krugman called “bogus”) about what Obamacare spending should be compared with.
Blahous publicly responded, defending his position. A few days later, former CBO Director and former OMB Director Peter Orszag joined the broadside attack against Blahous. Peter also joined in the credibility attack and went on to also attack Blahous’ choice of baseline.
So who is right? The point of this post is to try to provide a bit of clarity on the issue.
Before proceeding, I should disclose my own personal biases. First, I consider both Chuck Blahous and Peter Orszag to be personal friends – and I believe both would agree with that assessment. I have known and worked with both of them for over a decade. I have an incredibly high level of respect and admiration for both Chuck and Peter as public servants, as intellectuals, and as individuals. This is not the first time they have publicly tangled (they did so frequently over Social Security reform). Ideologically, I almost always find myself on the same side of issues as Chuck. But Peter is an outstanding economist, and when his views are also echoed by other highly respected economists like David Cutler of Harvard (one of the most highly respected health economists in the world, who engaged in a debate with Chuck on my Facebook page), I often find myself temporarily in a state of cognitive dissonance. When this happens, I try to figure out the core reason for the disagreement. Is it different values (e.g., perhaps one cares more about redistribution and the other more about economic efficiency)? Is it different assumptions (e.g., fundamentally different views about how the politics will play out or on how future health costs will evolve?) In such cases, two very smart people can disagree on policy, without either being “wrong.”
But this debate seems different. This is – or at least should not be – an ideological debate. The question here is deceptively simple. It is a debate over a “fact.” Either Obamacare increases the deficit, or it does not.
So who is right?
The correct answer is “it depends.”
To understand the long-term effect of any public policy change, one must first ask the question “compared to what?” And this is where Blahous and Krugman/Orszag differ.
The following is a FICTITIOUS conversation between Blahous and his critics. I am trying to be clear on their views. The material in “quotes” is taken from their writing. The rest is my own attempt to explain their views, and I alone am responsible for any misattributions. The Orszag quotes can be found here. The Krugman quotes are here. Blahous’ views can be found in his original paper, his follow-up post on Forbes, and a new post at E21. The use of the term “Obamacare” is mine.
Me: “If I look at the new spending programs under Obamacare, and compare that to any spending reductions or tax increases under Obamacare, does the program increase or decrease the deficit?”
Blahous: Over the next ten years, the increases in spending from Obamacare – Medicaid/CHIP, new exchange subsidies, making full Medicare benefit payments for an additional eight years, etc. – exceed the ways that it reduces spending or raises taxes by $346 billion through 2021. (This is based on a CBO projection of $352 billion adjusted slightly by Chuck.)
Krugman: This is just “another bogus attack on health reform.”
Orszag: Indeed. The cost savings exceed the new costs by $123 billion through 2021.
Blahous: But you are both ignoring the cost of extending the solvency of Medicare! One of the effects of Obamacare is to extend our full financing commitment to Medicare through 2024. This costs money. Add up all the things the legislation does, and it is $346 billion more than the legislation’s cost-savings.
Orszag: This is a “trick.” The Blahous analysis “begins with the observation that Medicare Part A, which covers hospital inpatient care, is prohibited from making benefit payments in excess of incoming revenue once its trust fund is exhausted. He therefore argues that the health reform act is best compared to a world in which any benefit costs above incoming revenue are simply cut off after the trust-fund exhaustion date. Then, he argues that since the health-care reform act extends the life of the trust fund, it allows more Medicare benefits to be paid in the future. Presto, the law increases the deficit by raising Medicare benefits.”
Blahous: Look guys, this is really simple. Without the ACA, Medicare would have been insolvent in 2016. Under the new legislation, we are making a binding commitment to make full benefit payments through 2024. These are real payments to real people. How can you ignore the extra commitments through 2024? After all, you claim the Medicare solvency extension as one of the achievements of the ACA.
Krugman: “OK, this is crazy. Nobody, and I mean nobody, tries to assess legislation against a baseline that assumes that Medicare will just cut off millions of seniors when the current trust fund is exhausted.”
Blahous: But under a literal interpretation of current law – which is how most budget scoring is done in Washington – a law that extends Medicare for additional years would be scored as a cost. Do you acknowledge that under a literal change in law, this legislation puts us $346 billion deeper in the hole?
Krugman: The literal law does not matter. Everyone knows that Congress is not going to allow Medicare benefits to be slashed in 2016. To suggest these costs are a cost of Obamacare is misleading. “In general, you almost always want to assess legislation against ‘current policy’, not ‘current law’; there are lots of things that legally are supposed to happen, but that everyone knows won’t, because new legislation will be passed to maintain popular tax cuts, sustain popular programs, and so on.
Blahous: But we have to abide by these budget rules in other contexts. For example, let’s look at the Alternative Minimum Tax. The Congressional Budget Office counts the revenue from the AMT in its baseline budget projections, even though it knows full well that Congress is likely to continue to provide AMT relief before that revenue is collected. Similarly with the “doc fix” in Medicare!
Orszag: Yes, but by your logic, if we just assume that Medicare benefits are cut when the trust fund runs dry, or that Social Security benefits are cut when its trust fund runs dry a few decades later, then we do not have a long term budget problem! Indeed, Chuck, you are “far too modest. The government is not legally allowed to issue any debt above the statutory limit, so (you) should have assumed the deficit would disappear when we reach that limit at or around the beginning of next year.”
Blahous: Look, when you make Medicare benefit payments, real money leaves the US Treasury. We can’t send the same check to Medicare and to Medicaid. If you want to take credit for all the benefits of the ACA – one of which was to extend Medicare – then you have to account for the Medicare commitments as well as the Medicaid ones. Even if you don’t think we would have allowed benefits to be suddenly cut, historically Congress has always enacted other savings to avert Medicare insolvency. And, now that Medicare solvency is extended through 2024, the pressure on Congress to enact further savings is reduced. So it’s not only as a matter of literal law but as a matter of practical budgetary behavior that the ACA worsens the outlook. No matter how exactly you think things would have played out under prior law, this legislation still worsens deficits by $346 billion relative to prior law.
Krugman: Don’t believe any of this. The Mercatus Center is funded by the Koch brothers. The Koch brothers, by golly!!
Blahous: Look guys, I am trying to make a real point here, not engage in character assassination. If carried to its logical conclusion, this is not only a departure from interpreting actual law, it is also fiscally dangerous. You guys are basically saying that there are no prior law restraints on Medicare spending. So every time we extend the program’s solvency, it does not cost anything!
Me: Okay, guys, thanks for clearing that up. I understand it all so much better now.
So there you have it. A knock-down, drag-out battle over budget baselines. The debate is not over the cost of things like the coverage mandate. It is a debate over the proper way to account for an extension of Medicare’s solvency.
Relative to a world where Medicare expenditures are brought into balance with revenues within the next few years (which does appear to be required under the literal reading of current law), ACA increases Medicare expenditure and the deficit. This is the Blahous view.
Relative to a world in which we project current practice forward, ACA reduces Medicare expenditure and the deficit. This is the Krugman and Orszag view.
I think most reasonable people can understand both points. And I don’t think this really calls for name-calling and credibility-questioning. But in Washington, that is what passes for debate.
Most ordinary people probably think that what we should be doing is making some cuts, but not cut so deeply as to eliminate the entire Medicare shortfall. If so, the effect on the deficit is better than if we did nothing, but worse than if we solved the problem.
So most people probably think the “truth” (whatever that means in this context) lies somewhere in the middle.