This comment is addressed to those fiscally conservative Members of the House of Representatives thinking of voting for pending health care legislation.
America is on an unsustainable fiscal path. If we do nothing to address this, within 25 years the U.S. government will default on its debt, with devastating consequences for the U.S. economy and society.
We are on this path because past elected officials made unsustainable benefit promises and enshrined them in law. In some cases they paid for those promises in the short run. In all cases they created programs that would grow more generous over time.
Those past elected officials enjoyed the political benefits of creating a new promise, and they shifted the burden of paying for these promises onto their successors and onto future generations of citizens.
You are their successor, and we are those future generations. The bill is coming due. The gap between future spending and taxes is the most important economic problem America faces. If we don’t fix it, we’re screwed.
To fix this problem we need to slow the growth of Social Security, Medicare, and Medicaid spending. You may think we also need to raise taxes, either for reasons of policy or of political compromise.
The long-term fiscal gap is enormous. It’s not measured in billions or even tens of billions of dollars. It’s measured in percentage points of GDP. One percent of GDP this year is $146 billion, and our fiscal gap is many times that. We need to make huge fiscal policy changes to avoid economic disaster.
Big changes are easier to make if we phase them in gradually, so people have time to plan and adjust. The longer we wait to start, the bigger the necessary changes, and the more wrenching they are to American society.
Good policy is to start these changes immediately, so that they’re in place and it’s hard to repeal them. Set the changes up so they grow steadily over time. Turn the aircraft carrier by an enormous amount, begin immediately and do it gradually, but lock the full course and ultimate direction in now. American society can then incrementally adjust to the changing conditions, and elected officials will not be confronted with sudden, disruptive, painful policy spikes they will be tempted to postpone or repeal.
Slowing the growth of popular entitlement programs is politically painful. So is raising taxes. Elected officials get punished for both.
This problem may seem politically intractable because of serious policy disagreements about the relative mix of spending changes and tax increases. Each party sees electoral advantage in attacking the other’s possible proposed solutions, so it’s hard to cooperate across the aisle.
As the pain of a government default approaches, markets will punish the U.S. economy to the point where elected officials will be forced to negotiate a solution. The danger is that you and your colleagues wait until this time, when the changes needed will be bigger and even more painful. If you can fix this before the markets force you to, America will be better off.
You have to fix this because your predecessors made an expensive promise and left you the bill. If you don’t fix it, your successors will have to. After that, the clock runs out and the economy collapses.
Now President Obama and your party’s Congressional leaders want to make a new promise. They want to expand the role of government so that almost every American has prepaid health insurance. Like past promises, this is attractive to the millions who would receive the benefits of this new promise, and to many more who feel compassion for them. Like many, you probably believe that reducing the number of uninsured is an important policy goal.
What about the costs of funding this new promise? In this legislation President Obama and your party’s Congressional leaders have made some hard choices. The biggest are policies that would slow the growth of Medicare spending and policies that would raise certain taxes. These are hard policy choices that involve societal pain and political risk.
The legislation has been structured so that, if it is never changed, and if the projections hold true, the costs of this new promise will be fully offset by the Medicare “cuts” and tax increases. The costs of the new promises will not be shifted to the future if those two conditions hold. The referee says that, if those two conditions hold, this new promise has been paid for.
That makes this bill different than some of its predecessors. The President argues that it is more responsible than past promises. He argues further that it is fiscally responsible. I agree with the first and disagree with the second.
If these bills become law, we are left with two problems. The assumed conditions may not hold, so this new promise may in fact be underfunded just like all prior promises. And even if the conditions hold, we still have left unsolved the long-term fiscal problem with which we began, and we have fewer tools available to fix it.
The assumed conditions will not hold because they are not designed to hold. The bills’ authors have cleverly constructed the promises so that they are paid for in an accounting sense, but are politically unsustainable. New Medicare spending on doctors is paid for, as long as you believe Congress will allow even bigger cuts to take effect two years from now. The new insurance subsidies are paid for, as long as you believe that a tax increase scheduled to begin far in the future will survive eight years of labor union lobbying for repeal or perpetual delay. The new insurance subsidies are designed to cover those who buy health insurance outside of employment, but not those with the same salary who get health insurance through their job. If you believe this inequity is politically sustainable, then the bill is paid for. If instead you think there will be unbearable political pressure to provide equal treatment and expand subsidies to some of the 100+ million Americans who today get their health insurance through their job, then the subsidies you enact now are only the camel’s nose under the tent, and you are setting us on a path to an even larger and unfunded government promise.
The bill’s architects have cleverly gamed the rules to minimally satisfy the requirements of getting the referee to say the new promise is funded, while creating real long-term fiscal risk. There is an obvious parallel to the financial engineers who worked with credit rating agencies to tweak new risky credit derivatives until they barely qualified for a AAA rating. The financial engineers did not eliminate real risk, they instead solved for the rating agency’s scoring model. They then sold these products to clients as safe investments, with a wink. The authors of the pending health care bills have done the same with the CBO scorekeepers. You are the potential client being asked to buy this product. The proponents assure you that the scorekeeper says it’s OK. Then they wink.
Like many clients who did not understand the derivatives they were buying, you may not be an expert in the arcane world of CBO scoring. Or you may believe the bill will be implemented exactly as written, that there will be no future expansions or spending increases, and that future elected officials will resist all of the above pressures. If so, you still must wrestle with the unsustainable fiscal path with which we began. The deficit reduction credited to this bill by the referee and claimed by the bills’ proponents sounds large, but compared to our long-term fiscal problems it is trivially small. The President argued that health reform is entitlement reform, and that slowing the growth of health spending would address our long-term fiscal problem.
Instead, at best this bill makes our long-term fiscal problem no worse, while using up options to solve it. The pending legislation takes all of the easiest hard choices and uses them to offset the new promise. This leaves even harder and more painful policy choices when policymakers choose or are forced to address the long-term fiscal problem.
The pending legislation raises taxes “on the rich.” When someone tries to close our long-term fiscal gap, these tax increases will no longer be available.
The pending legislation slows the growth of Medicare spending, but then spends that money on the new promise. We still have the old unfunded promises, and those relatively easy Medicare policy changes will no longer be available to fund them.
When you or your successors choose or are forced to solve our long-term fiscal problem, these tools will be unavailable. You will have to reduce benefits and charge seniors higher premiums, copayments, and deductibles. You will have to cut provider payments even more. You will have to means-test benefits more aggressively. You will have to raise the eligibility age for these programs. If you favor tax increases, you will find yourself evaluating options to raise them not just on the rich, but also on the middle class. The arithmetic will force you to do these things.
You will have to do some of these things even if the pending health care bills die. You will have to do many more of them if these health care bills become law.
You are being pushed to do a variant of what your predecessors have done. Solve a societal problem. Make a popular new promise. Ignore those who warn the promise is underfunded. Worry about the existing long-term problem later, or better yet, hand it off to the next crowd. If this legislation makes that long-term problem harder to solve by taking future options off the table, someone else can worry about that.
There is a simple answer, and you can choose it. Break the cycle. Don’t make a new promise that makes our biggest problem harder to solve and pushes it into the future. On our current path there’s not much future left.
Make us no new promises, please, until you have funded the old ones.
(photo credit: epSos.de)