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Monthly Archives: November 2013

One of the best-ever economist jokes has three econometricians out deer hunting.  They encounter a deer, and the first econometrician takes his shot and misses one meter to the left.  Then the second takes his shot and misses one meter to the right, whereupon the third begins jumping up and down and calls out excitedly, “We got it!  We got it!”

By latest accounts, the current budget conference committee is giving a fair impersonation of those three econometricians, aiming both too high and too low.  They are acting as though this game were on the level (that is another joke for another day), and therefore are trying to produce some real product.  But being incapable in these circumstances of producing something truly real, they are faking it.  The result may turn out to be a substantial disappointment, though it may still turn off the pending appropriations and debt-limit crises – which would be sufficient reason for all of us to turn Washington off for a few weeks, and enjoy the holidays.

Back in August of 2011, the Congress and the President escaped an already far too close brush with the debt limit by creating a Supercommittee, charged with saving $1.2 trillion – or else that amount would be cut mostly from annually appropriated spending.  Almost everyone agreed that if put into effect, this automatic “sequester” would be excessive; and so it was assumed that it would motivate the Supercommittee to cut a deal.  However, this trigger did not have its intended motivational effect, and so it was pulled.

Today, as we approach yet another pair of scheduled train wrecks – one more appropriations expiration and potential government shutdown on January 15, and the beginning of another debt-limit drama on February 7 – the sequester has somehow claimed a leading dramatic role.  This is truly hard to justify.  Not only is the sequester not sound budget or governmental policy, its amount is also arbitrary, and insufficient to solve the actual long-term budget problem.  Yet the new budget resolution conference committee – and the Congress as a whole – have chosen to sanctify the sequester as their reason for being.  They seek somehow to replace the arbitrary sequester savings for the next year to justify enacting appropriations and turning off the debt limit.

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A couple of weeks ago, I had the pleasure (based on the fellowship, not the subject matter) of speaking at the annual Economic Summit of the Dallas Regional Chamber about the budget problem.  There were so many written questions submitted for the discussion period at the end of the session that the moderator could feed in only a few.  Briefly this week, I would like to try to answer one question that did not come up during that discussion.  In a later entry or entries, I will try to do some more.

This first question is one that I have heard occasionally, but which has never been addressed actually to me.  It goes something like this:  What would be worse, a federal government default, or running up this enormous debt to pass on to future generations?

My answer, which I perceive from the question would come off as contrarian, would be “default.”  It probably will require some explanation.

(To clarify terminology at the outset:  The written question used the term “default,” as I suspect did I in the oral presentation.  There are strong differences of opinion about the precise meaning of that term.  Some believe that only the failure to pay principal or interest on a debt would qualify as “default;” others would say that it means simply failing to pay all of your bills in full and on time.  Trying to respect these differences in the following discussion, let me confess that I fall into the latter camp.)

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Well, not quite that many, but the Congressional Budget Office (CBO) has released its latest in what has evolved into a once-every-two-years series, Options For Reducing The Deficit. This genre was created back in the 1970s and evolved toward its current form in the 1980s, when concern over the federal government’s booming deficit rose to a fever pitch.  The idea was to give the Congress an unbiased, on-the-one-hand-on-the-other-hand evaluation of something approaching the deficit-reduction waterfront.  There were ideas for cutting spending and raising taxes, and the legitimate pros and cons of each idea were presented in a dispassionate fashion, with all of those options organized by parts of the budget – entitlement programs, by purpose; appropriated programs, by purpose; and revenues, by type of tax.  An interested Member of Congress or staff member could use the volume like an encyclopedia to see how his or her target area of the budget might be accessed for savings.

(I worked at CBO from 1981 into 1984, and was involved in the preparation of the reports of that period.  My clearest memories of the process are the careful and unbiased work of the organization’s entire staff that went into the reports, and my first self-taught lesson in tactical forensic editing.  For my second edition, I was told that my chapter, on revenue options, was quite satisfactory but much too long, and I was given what my supervisors clearly believed to be a draconian number for reduction of the page count.  I analyzed the chapter and found that the typical discussion of an individual policy option was one page plus a small number of lines long, with the formatting of the volume dictating that the remainder of that second page be left blank.  I carefully combined a few paragraphs, with each combination saving on average one and one half lines [counting the blank line between paragraphs], and thereby pulled the few lines from the second pages back onto the first pages, quickly hitting my page-reduction target without deleting a word.  I trust that my supervisors of that time, who expressed great admiration that I could do the job so quickly and effectively, are not reading this blog.)

The CBO volume has become an essential building block of all discussions about reducing the deficit.  Many deficit-reduction plans have been constructed merely by figuratively checking the boxes of a list of the CBO options.  Computer games BlogQuote20131115have been designed to allow individuals in effect simply to choose from among the CBO options in a spreadsheet until they reach a target amount of deficit reduction or (to say the same thing in different words) a target lower level of debt.  Such games have been made available on the Internet, or even taken to town-hall meetings so that people can debate their own deficit-reduction choices with their neighbors around a conference table.

These games have performed important functions.  At the most fundamental substantive level, they have forced people to face up to the size of the budget problem.  The more Americans who become aware that eliminating foreign aid and cutting congressional salaries to zero will not begin to trim our mounting debt, the better.  And with that reality on the table, getting people together to debate the necessary and far more difficult choices is obviously a good thing.  Getting folks with strong preferences for tax increases and against spending cuts, and vice versa, to debate the best combination of both is an important public service.

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The federal budget outlook has improved over the last year.  The budget always moves with the economy, and there is a tendency for the numbers to move more than had been projected when a business cycle bends around a turning point.  There are reasonably predictable relationships among output, employment, wages and profits, but financial market valuations and the incomes that flow from them are a bit of a wild card.  For whatever reason, the swings in those incomes always tend to be sharper than the budget mavens expect when the economy changes direction — more sharply upward in good times, more sharply downward in bad times.

So right now we are in an upswing, and that is good news.  However, every now and then the hosannas seem to be just a bit louder than appropriate.  It may be useful to try to put the recent changes into context.

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In 2010, the Committee for Economic Development announced in a public statement that we believed that the right vote on the Patient Protection and Affordable Care Act was “no.”  We acknowledged that the creation of the health-insurance exchanges was a step toward employing market forces in health care, but we believed that it was being done in a far-from-optimal way.

While noting our opposition to the ACA, one must have a certain sympathy with the law’s defenders today with respect to one particular sore spot in the implementation of the law.

During the 2009-2010 debate, the law’s strongest advocates made two emphatic statements:

The current health-insurance system is horrendous.  It inhumanely denies coverage to millions of hardworking Americans.  And it is inefficient and unaffordable for households, employers and the federal government alike.  It wastes money in bad care, under-care, and even over-care that causes more pain and cost than it does healing.  It is more costly than care in any other developed country, and yet it yields inferior outcomes by every major indicator of health.  Our healthcare system is a disaster.

 

…and…

 

If you like it, you can keep it.

Clearly, the first manufactured “quote” is a caricature of the debate, but many on both sides of the key 2010 votes said nearly that.  And equally clearly, the second “quote” was not precisely paired with the first.  But the juxtaposition of the two does not do violence to the reality.  And so today, when numerous Americans find that the insurance plans with which they have been satisfied will be discontinued with the implementation of the ACA, there is considerable angst.  Some, perhaps much, of it is justified.  But there is an important lesson in this angst, and we should absorb it.

Some existing insurance plans should go away, and are doing so because of reforms in the ACA that have majority bipartisan support.  We know from experience, for example, that there was until recently a sub-industry of health insurance that combed the original application forms – sometimes years or even decades old – of now seriously ill customers to find discrepancies that could be used to deny coverage.  Sometimes they used grounds of pre-existing conditions, but sometimes they sought circumstances totally irrelevant to the ailment in question.  Such “rescissions,” as well as discrimination at the time of application on the basis of pre-existing conditions, are now banned by law.  Insurance policies created using business plans that relied on after-the-fact rescission to generate their profit are not viable in the new, and arguably better, marketplace.

But put such obvious issues aside.  Consider instead only the basic question of the efficiency of delivery of health care.  On a totally bipartisan basis, analysts pronounce as a truism that our system of delivering care must change if it is to remain affordable at acceptable levels of quality.  And assume for sake of argument that the ACA is wiped from the face of the industry, and the nation can start fresh.  What reform that fundamentally changes our mode of delivering health care can promise that every American can keep the insurance that he or she has today?

This is not an empty question, and not a mere acknowledgement that to make the soufflé, we must crack some eggs.  Millions of Americans know that they have medical conditions, and are today in a physician’s regular care.  Many of those have coverage in the old-fashioned fee-for-service system, where incentives reward providers who deliver more services – helpful or not.  Suppose that a fully justified reform creates strong incentives toward new modes of organization that integrate providers into cost-responsible systems.  How many thus-outdated insurance plans will go away?  How many providers already near the ends of their careers will contemplate the changing world and then decide to hang up their stethoscopes and retire?  So how many of their patients will find that they cannot “keep what they have,” and will blame the reform for disrupting their care and their lives?

Any new healthcare system, either the current ACA or any successor, will need to deal with such questions of transition.  The ACA included a “grandfather” clause for existing plans, but merely allowing a plan to continue legally does not mean that it will continue if reform-induced changes in the marketplace undermine its business model.  Thus, anyone who hopes to restructure the U.S. healthcare system, even if unambiguously to the entire society’s betterment, must be prepared to respond to the many individuals – often the elderly or the sick – who will not be able to “keep what they have.”

This past Wednesday, the conference committee on the fiscal year 2014 budget met.  The plan is that they will meet again on November 13, two weeks from now.  Their deadline to produce recommendations is December 13, and their objective is to avoid another government shutdown and the impending budget sequester that is set to occur on January 15.

A two-week recess with such a short deadline might not seem promising.  However, the recess is not the problem.  Public meetings of conference committees are not where the work is done.  Under the best of circumstances and with the best of outcomes, a conference committee might have one public meeting, during which all of the members present opening statements in which they say how important the work of the conference committee is; and then a second public meeting, during which the members vote on the final product, and present closing statements in which they say how important the work of the conference committee was.  In between, the important decisions were made in private meetings, generally informal (to avoid requirements that the meetings be held in public).

The real problem is that it is not clear whether anyone in the room has the authority to cut the deal.  The issues at stake long ago have escalated to the leadership level.  In fact, with the margins in the two chambers so narrow, even the leaderships must go to their rank and file hat-in-hand and request their votes.  We know from the last shutdown season that the caucuses can send their leaderships back to the drawing boards, and leave the necessary legislation in limbo.

The opening statements in the budget conference were generally conciliatory.  However, they stopped far short of common ground.  Republicans continued to declare tax increases off limits, while Democrats asked for at least one tax-loophole closure to justify the expected cuts in entitlement programs to “pay for” lifting the budget sequester.  This time, as last time, Republicans have the upper hand, at least in theory.  The Republican House could send the Senate a continuing resolution bill to extend appropriations with the sequester, with an increase in the debt limit attached.  Democrats in the Senate would have to come up with a reason for the House Republicans to change their minds.

It is worth remembering that the ostensible goal of this conference – to remove the sequester, reduce entitlements and / or increase taxes to offset that budget cost, and increase the debt limit – would neither reduce the long-term debt problem nor stimulate the economy.  Of course, there are potential questions of timing of spending increases versus other budget cuts, and there are potential permanent spending cuts that in the very long term would exceed the spending increases.  But speaking broadly, both the potential macroeconomic and fiscal-responsibility stakes in this game are extremely low.  You probably have heard the old saw that it is the low stakes that make academic politics so vicious.  Perhaps the same will prove true about the budget conference, but we have learned very little from the opening meeting.