Making Sense of the War of Words over the Cost of Obamacare

Filed Under (Health Care, Retirement Policy, U.S. Fiscal Policy) by Jeffrey Brown on Apr 18, 2012

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 hereThe 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. 

To summarize:

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.

Zombies, Paul Krugman, and a Fundamental Misunderstanding of Social Security

Filed Under (Retirement Policy, U.S. Fiscal Policy) by Jeffrey Brown on Jun 29, 2010

Paul Krugman wrote last week that Zombies have killed President Obama’s Deficit Commission. He refers to a “Zombie lie” having to do with exactly when Social Security will begin its financial problems. It is the typical Krugman approach – rather than have a serious discussion about economics, he instead resorts to name-calling.

So let me try to explain the economics behind this debate (for an interesting view of the politics, check out Keith Hennessy’s post on the topic). Back in 1983, a Social Security reform commission (now referred to as the Greenspan Commission, after Alan Greenspan who served as its chair) made substantial changes to Social Security taxes and benefits. One effect of these changes was to put Social Security on a path in which it would run cash surpluses for several decades. These surpluses were to be “saved” in a “trust fund” (actually, there is more than one trust fund, but we can safely ignore that distinction for now and treat them as one) that could then be drawn down once the demographic shift resulted in benefit payments exceeding annual tax revenue and Social Security starts running deficits (note – we are now virtually there).

On paper, this is exactly what has happened. Since 1983, we have collected several trillion dollars worth of taxes in excess of Social Security benefits paid. And those surpluses have been credited to a Social Security trust fund. When people say that politicians have raided the trust fund, they are not correct – at least technically. This is because every dollar of surplus has been credited to Social Security’s trust fund in the government’s official ledgers.

But that is all just government accounting. And accounting can be gamed and gimmicked. Most importantly, these accounting games tell us nothing about the economic impact. To understand that, we have to understand what these surpluses have to do with national saving.

Suppose, for example, that Congress simply decided to transfer $10 trillion on paper into the Social Security trust funds (such as by retroactively increase the interest rate paid on the trust funds to a very high rate). Suddenly, the trust funds would have much more money in them, and Social Security would appear solvent. Great solution, right?

The obvious problem is that every dollar in the trust fund – which represents a dollar of assets to Social Security – also represents a one-dollar liability to the federal treasury. Thus, if we simply decreed that there were now an extra $10 trillion in the trust funds, all we have done is transfer from one government agency (treasury) to another (Social Security). But ultimately, we still have to find the $10 trillion to make good on this promise.

Where does that $10 trillion come from? Out of the productive capacity of the U.S. economy in the form of higher current or higher future taxes.

Now, you might say, there is a big difference between simply decreeing the existence of money, and having actually saved the money through past surpluses. This is correct. If those past surpluses added to national saving, then presumably the higher saving rate spurred investment, and the economy is larger today than it otherwise would have been.

Here is an analogy. Suppose I divide my household expenditures into “mine” and “my wife’s.” Suppose that in the “mine” account, my income exceeds my expenditures by $10,000 per year. In “my wife’s” account, her income falls short of expenditures by $15,000 per year. So rather than me sticking my $10k in a bank, I loan it to her. This means I am running a $5k surplus in the “min” account, she is running a $15k deficit in her account, and our combined household is running a “unified deficit” of $5k.

Suppose we do this every year. So by the time I reach retirement, I have “saved” $250,000 in accumulated surpluses and interest in the form of I.O.U.’s from my wife. I call this my trust fund. But this means my wife owes me $250,000 (in addition to the $125,000 she would owe to other creditors.)

It might make me feel good to say that I have a quarter million in savings. But my wife and I are not exactly well-prepared for retirement, are we?

The question becomes, am I better off having saved $10k per year? Well, it depends. If my wife would have run $15k deficits whether I saved or not, then, yes, we are better off. But if the fact that I was saving $10k per year means she ran deficits of $15k per year instead of $5k per year, then we are no better off.

And, either way, we still have to come up with money to pay off our debt and feed ourselves in retirement. That money has to come from somewhere …

So it is with the government. Social Security saved all this money for the past 25-30 years. The rest of government spent it. Now the treasury owes Social Security trillions of dollars. It is fine to say that the treasury must pay it. But where does Treasury get the money?

Empirically, nobody can say for sure whether those Social Security surpluses were saved in an economically meaningful way. Republicans tend to argue that none of it was saved – that every dollar of Social Security surplus was spent on massive deficits elsewhere in the government. Democrats say those “on budget” deficits would have existed whether or not Social Security ran a surplus, and therefore the Social Security surpluses still increased national saving (or reduced dis-saving.)

Ultimately, it is an empirical question whether the surpluses added to saving or not, but unfortunately it is an empirical question we cannot really answer because we never get to observe the counter-factual world in which we hold everything constant except the size of the Social Security surpluses. This has not stopped researchers from trying, and they have found mixed results with some saying it has contributed a bit, other saying not at all. Nobody has claimed empirically that it was all saved.

Bringing this back to Krugman. He is clearly taking one side in this debate. By arguing that the only date that matters is when the trust funds are exhausted, he is implicitly arguing either that (a) 100% of the surpluses were saved, or (b) that he does not care about the broader economic impact, but only about government accounting rules. Either way, it is rather strange to take such a view and then claim that the other side is thinking like a Zombie …