Minor Thoughts from me to you

Jon R. Gabel writes in the New York Times today, saying that we shouldn't fear the cost of health care reform because the CBO has a long history of underestimating the savings from reforms.

In the early 1980s, Congress changed the way Medicare paid hospitals so that payments would no longer be based on costs incurred. ... The Congressional Budget Office predicted that, from 1983 to 1986, this change would slow Medicare hospital spending (which had been rising much faster than the rate of inflation) by $10 billion, and that by 1986 total spending would be $60 billion. Actual spending in 1986 was $49 billion. The savings in 1986 alone were as much as three years of estimated savings.

In the 1990s, the biggest change in Medicare came with the Balanced Budget Act of 1997, a compromise between a Republican-controlled Congress and a Democratic administration. ... The actual savings turned out to be 50 percent greater in 1998 and 113 percent greater in 1999 than the budget office forecast.

In the current decade, the major legislative change to the system was the Medicare Modernization Act of 2003, which added a prescription drug benefit. In assessing how much this new program would cost, the Congressional Budget Office assumed that prices would rise as patients demanded more drugs, and estimated that spending on the drug benefit would be $206 billion.

Actual spending was nearly 40 percent less than that.

I find it interesting though that his savings numbers only extend out a few years. For instance, he talks about how much was saved in 1986, from the 1983 bill, but doesn't talk about hospital spending trends since then. How much has the 1983 bill saved over the past 26 years? He talks about how much money was saved in 1998 and 1999 as a result of the Balanced Budget Act of 1997, but he doesn't talk about how much has been saved in the intervening 10 years. Did the trend continue?

Then I saw this graph, of Congressional health care underestimates. (Courtesy of John Goodman, courtesy of the Joint Economic Commitee. You can read the full report.)

It looks like health care costs are underestimated far more than they're overestimated.

Just in case you're case curious, the current projected 10-year U.S. budget deficit is now $9.1 trillion. That's on top of the $11.7 trillion of debt that the U.S. currently owes. The Wall Street Journal has further information on the rather grim news.

CBO predicts that debt held by the public as a share of GDP, which was 40.8% in 2008, will rise to 67.8% in 2019--and then keep climbing after that. CBO says this is "unsustainable," but even this forecast may be optimistic.

Here's why. Many of the current budget assumptions are laughably implausible. Both the White House and CBO predict that Congress will hold federal spending at the rate of inflation over the next decade. This is the same Democratic Congress that awarded a 47% increase in domestic discretionary spending in 2009 when counting stimulus funds. And the appropriations bills now speeding through Congress for 2010 serve up an 8% increase in domestic spending after inflation.

Another doozy is that Nancy Pelosi and friends are going to allow a one-third or more reduction in liberal priorities like Head Start, food stamps and child nutrition after 2011 when the stimulus expires. CBO actually has overall spending falling between 2009 and 2012, which is less likely than an asteroid hitting the Earth.

Federal revenues, which will hit a 40-year low of 14.9% of GDP this year, are expected to rise to 19.6% of GDP by 2014 and then 20.2% by 2019--which the CBO concedes is "high by historical standards." This implies some enormous tax increases.

CBO assumes that some 28 million middle-class tax filers will get hit by the alternative minimum tax, something Democrats say they won't let happen. CBO also assumes that all the Bush tax cuts disappear--not merely those for the rich, but those for lower and middle income families as well. So either the deficit is going to be about $1.3 trillion higher than Washington thinks, or out goes Mr. Obama's campaign promise of not taxing those who make less than $250,000.

What would the deficit projections look like it the CBO forecasts matched Congress's behavior? Even more depressing. The Concord Coalition publishes a "plausible baseline" that uses more realistic assumptions. They project the 10-year deficit as $14.4 trillion.

If we continue on the spending path that we're on, we'll more than double the national debt in only a decade.

One more thing. These numbers are what the budget looks like before passing a healthcare bill that's forecasted to add another $1 trillion to the deficit all by itself.

Red State updates an old MoveOn.org ad, questioning who will pay for the President's massive amount of deficit spending. Remember when the Democrats were against deficit spending? Boy do I miss those days.

Now, Social Security is projected to go into deficit as early as fiscal 2010. And the President's budget has increased the national debt by $6.5 trillion. That's pretty impressive for only four months of work. What will the debt look like by 2012?

I've read some good news on taxes today. At least, I think it's good news.

First, Senator Evan Bayh (D) wrote a Wall Street Journal op-ed critizing the omnibus spending bill that's currently working it's way through the Senate.

The Senate should reject this bill. If we do not, President Barack Obama should veto it.

The omnibus increases discretionary spending by 8% over last fiscal year's levels, dwarfing the rate of inflation across a broad swath of issues including agriculture, financial services, foreign relations, energy and water programs, and legislative branch operations. Such increases might be appropriate for a nation flush with cash or unconcerned with fiscal prudence, but America is neither.

Drafted last year, the bill did not pass due to Congress's long-standing budgetary dysfunction and the frustrating delays it yields in our appropriations work. Since then, economic and fiscal circumstances have changed dramatically, which is why the Senate should go back to the drawing board. The economic downturn requires new policies, not more of the same.

The solution going forward is to stop wasteful spending before it starts. Families and businesses are tightening their belts to make ends meet -- and Washington should too.

The omnibus debate is not merely a battle over last year's unfinished business, but the first indication of how we will shape our fiscal future. Spending should be held in check before taxes are raised, even on the wealthy. Most people are willing to do their duty by paying taxes, but they want to know that their money is going toward important priorities and won't be wasted.

Senator Bayh voted for the "stimulus" package, so I'm not sure how seriously to take these criticisms. Still, it is refreshing to see a Democrat criticizing a spending bill.

Secondly, Senators are starting to rebel over some of Obama's tax hikes.

The resistance from Mr. Obama's own party -- focusing on a single element of the president's tax plans -- could foreshadow broader troubles for the rest of his proposed tax increases.

Sen. Max Baucus (D., Mont.), the Senate's top tax writer as chairman of the Finance Committee, told Mr. Geithner he was especially concerned about paying for expanded health coverage with a deductions curb that "has nothing to do with health care." He added: "I'm wondering about the viability of that provision."

Charitable organizations are also worried. Indiana University's Center on Philanthropy said Wednesday that Mr. Obama's proposals to limit deductions and raise rates, if applied in 2006, would have reduced giving by nearly $4 billion, or 2.1%.

"I'd like to think that people give out of the goodness of their heart, but that tax deduction helps to loosen up the heartstrings," Nevada Democratic Rep. Shelley Berkley said Tuesday during a House Ways and Means Committee hearing.

And, let's give credit to Washington Senator Maria Cantwell (D). She makes a great point:

Another Democrat, Sen. Maria Cantwell of Washington, questioned why the administration wouldn't look for savings in the tax code through a comprehensive overhaul. "Why not look at a broader approach to tax policy, [rather] than coming in with this proposed change to marginal rates?" Ms. Cantwell said.

This is certainly an unusual post. When was the last time I praised two Democrat senators in one post? Maybe there is something to Obama's hope & change rhetoric after all.

Congresswoman Tammy Baldwin had this to say about President Obama's budget.

I'm pleased that President Obama rejected the "creative accounting" of the Bush Administration, whose budgets never included the actual costs of the wars in Iraq and Afghanistan, and never fully funded the domestic programs that we desperately need - in education, health care, infrastructure, and energy. President Obama has presented us with an honest assessment of the challenges facing our nation. He also makes the tough choices necessary to restore fiscal responsibility and begin reducing the deficit, while making critical investments to help our economy not only recover, but grow.

.

Did she mean this kind of honesty?

The president used the word "honest." That's astonishing. Look, all budgets are fiction. This one is fantasia.

Look, let's start with the projections in revenue. Obama has promised to cut the deficit by the end of the first term in half. He does it by pretending that in 2011 there will be a growth in the economy of about 5.5 percent, and in the next year it will be over six.

Now, these are Chinese-level numbers, and even the Chinese aren't achieving them anymore. It is completely fictional, those numbers.

Next year he says we will grow at about 3.5 percent. Next year we could still be in negative territory.

And then on the cuts, he speaks about the $2 trillion in savings. And, actually, in the speech he gave to congress, he spoke of $2 trillion in savings, and now he has amended it, and he says, well, budget reduction.

And that's because half of it isn't savings at all. It's tax increases. And the other half is a fictional saving of a projected spending on Iraq, which would go out to ten years at the current levels, and have us spending in 2018 at a level that we are today that nobody expects and nobody even imagines.

So it's a saving of about a trillion and a half of Iraqi spending that would never have happened in the first place. And that's how he gets his spending cuts….

And on the agricultural cuts, he announced it proudly. It is $20 million, which means that if you have a thousand of those, a thousand of those, it would be 1/10 of one percent of $2 trillion in cuts he has promised.

It is a matter of scale. The cuts he's talking about are miniscule and almost risible when you look at his promises. The big cuts are actually tax increases fictional Iraq savings.

Or possibly she meant this kind of honesty.

Well, I think this budget is politically and economically risky, and precisely because it doesn't have enough spending reduction. If you look at what you've got, you've got about $2 trillion in deficit reduction.

That comes from $1.5 trillion in Iraq and Afghanistan reductions that are largely illusory. They pretend we would have spent $170 billion a year for a long time, and we're not.

And then a $700 billion increase in revenues from a cap-and-trade program that has never even come close getting through the U.S. Congress. So that's the deficit reduction, not obvious it'll come to fruition.

And then the rest is about $1 trillion of tax increases on high-income individuals and businesses to fund $1 trillion in tax cuts that are already on the books from the stimulus bill, with "Making Work Pay," Earned Income Tax Credit, things like that.

So you've got a dynamic where they're counting on things that are either illusory and hard to make happen politically -- cap-and-trade and tax increases -- to fund things that are already there. They didn't cut spending. And that makes all the deficits that are presented best-guess estimates. The risks are all the upside.

You know, I'm not sure that's really honest after all. That looks kinda like "creative accounting" if you ask me. I wonder what kind of honesty Congresswoman Baldwin meant? For Congresswoman Baldwin is an honorable woman.

Obama Delivers $3.6 Trillion Budget Blueprint - WSJ.com

The president blamed the nation's economic travails on the administration that preceded him and on a nation that lost its bearings. His budget plan projects a federal deficit of $1.75 trillion for 2009, or 12.3% of the gross domestic product, a level not seen since 1942 as the U.S. plunged into World War II.

"This crisis is neither the result of a normal turn of the business cycle nor an accident of history," the president states in an opening message of the 134-page document. "We arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies' executive suites to the seats of power in Washington, D.C."

By 2013, the deficit would drop to $533 billion but begin to climb from there again as the heart of the Baby Boom begins drawing Social Security and Medicare benefits.

Mr. Obama proposes large increases in education funding, including indexing Pell Grants for higher education to inflation and converting the popular scholarship to an automatic "entitlement" program. High-speed rail would gain a $1 billion-a-year grant program, part of a larger effort to boost infrastructure spending even beyond the funds in his $787 billion stimulus plan.

In one of the budget's most ambitious proposals, the president plans to cap the emissions of greenhouse gases, forcing polluters to purchase permits for emissions that would be slowly brought down to 14% below 2005 levels by 2020 and 83% below 2005 levels by 2050. The sale of those permits, beginning in 2012, would reap $646 billion through 2019. Of those revenues, $525.7 billion would be devoted to extending Mr. Obama's signature "Making Work Pay" $800 tax credit for working couples. Another $120 billion would go to clean energy technology.

Obama's 2% Illusion - WSJ.com

Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can't possibly raise enough revenue to fund Mr. Obama's new spending ambitions.

Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.

But let's not stop at a 42% top rate; as a thought experiment, let's go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable "dime" of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.

As the journal points out, incomes are falling fast right now. Taking a bigger share of a smaller income isn't really going to give you any extra money.

The Obama Baseline - James C. Capretta - The Corner on National Review Online

Politicians like to say they are "cutting the budget." But budget cutting can only be understood in context. Compared to what?

In budget-speak, there is a "baseline" against which budget decisions are measured. Normally, the "baseline" assumes current law and policy. But if you want to look like you are cutting the budget without really doing so, the answer is to inflate the "baseline" so that the cut is measured against an artificially high target.

President Bill Clinton did exactly that in 1993. In 1990, President Bush 41 had negotiated hard caps on appropriations spending that lasted through 1995. The "baseline" Congress used in 1992 assumed these caps held because a breach would trigger across-the-board cuts. In the first year of his presidency, Clinton wanted to look like he was cutting one dollar in spending for every dollar of taxes he was increasing, even though he wasn't willing to take the heat for real cuts. The solution? He redefined the baseline to assume the caps were no longer operative, announced his support for keeping what was already the law of the land, and claimed a sizeable spending "cut" as his own.

Pres. Barack Obama may be about to do the same thing.

Hope, change, and transparency gives way to huge, bloated budgets and more of the same old Washington tricks.

Happy Thursday!

Spreading Freedom and Saving Money: The Fiscal Impact of the D.C. Voucher Program

In August 2004 the first ever federally funded school voucher program began in Washington, D.C. Eligible students could attend a private school of their choice in the District of Columbia. Each participant received up to $7,500 for school tuition, fees, and transportation. In addition, the D.C. Public School System (DCPS) and D.C. charter school system each received $13 million in federal grants to improve their programs.

This study examines the fiscal impact of the voucher program on DCPS and the District of Columbia. The program is currently funded by the federal government and creates a net inflow of funds to both the District and DCPS. This study also examines the fiscal impact of the program under several proposed changes to the law. Those scenarios include funding the program locally, making it universally available to all D.C. public school students, and expanding capacity by including regional private schools.

Our findings include the following:

• The current program saves the city nearly $8 million, mostly because it is federally funded and includes a federal grant to public schools.
• If federal grant subsidies were withdrawn and the program were locally funded, the city would still save $258,402 due to the greater efficiency of school choice.
• A locally funded universal program would maximize the economic benefits of school choice, saving $3 million.
• The process by which both DCPS and its schools are funded is not conducive to efficiency or excellence. The voucher program currently allows the central administration to retain an even higher share of overall funding than it did previously, leaving the management of reduced expenditures predominately at the school level. A universal school choice program could help to put a larger share of resources into the hands of schools.

Full Text (PDF, 763 KB)

Robert Hanson suggests that we cut our healthcare spending by up to 50%. Why?

Am I being too allegorical? Then let me speak plainly: our main problem in health policy is a huge overemphasis on medicine. The U.S. spends one sixth of national income on medicine, more than on all manufacturing. But health policy experts know that we see at best only weak aggregate relations between health and medicine, in contrast to apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution, climate, and social status. Cutting half of medical spending would seem to cost little in health, and yet would free up vast resources for other health and utility gains. To their shame, health experts have not said this loudly and clearly enough.

So I want to say loudly and clearly what has yet to be said loudly and clearly enough: In the aggregate, variations in medical spending usually show no statistically significant medical effect on health. (At least they do not in studies with enough good controls.) It has long been nearly a consensus among those who have reviewed the relevant studies that differences in aggregate medical spending show little relation to differences in health, compared to other factors like exercise or diet. I not only want to make this point clearly; I want to dare other health policy experts to either publicly agree or disagree with this claim and its apparent policy implications.

How much could we cut? For the U.S. it seems reasonable to project the 30% cut in the RAND results to a 50% cut, since the U.S. spends so much more than other nations without obvious extra health gains. I thus claim: we could cut U.S. medical spending in half without substantial net health costs. This would give us the equivalent of an 8% pay raise.

As Hanson notes, his recommendations are not likely to be implemented soon -- or at all. So how can you benefit yourself?

Do you have little voice in health policy or research? Then at least you can change your own medical behavior: if you would not pay for medicine out of your own pocket, then don't bother to go when others offer to pay; the RAND experiment strongly suggests that on average such medicine is as likely to hurt as to help.

If this intrigues you, if you find yourself saying "It can't be true", then do go read the full essay. I just pulled four paragraphs out of a much, much longer argument.

He really does believe that more medicine is as likely to hurt you as it is to help you. Doctors make mistakes, just like everyone else. The best way to reduce your risk of mistakes is to reduce your exposure to hospitals, clinics, and medical professionals. QED.