A Chart That Should Keep Progressives Up at Night

11/20/2009

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(This is cross-posted from ProgressiveFix.com, the new online face of the Progressive Policy Institute, where I will be posting regularly.  Give 'em a look.)

In my last post, I noted that progressives need to turn their attention toward the medium- and long-term fiscal crisis the country faces. How massive is the challenge we face? The following chart, from Keith Hennessey, an ex-Bush policy advisor, says it all:
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Obviously the first thing to jump out is the escalating divergence between federal spending and revenues in the decades ahead. And the spending projection in the chart is from 2007, so it doesn’t include the stimulus or spending on the financial crisis (or the projected cost of health care reform). That’s scary enough. But the scariest part may not be evident at first glance.

The red line shows federal taxes as a percent of GDP going back to 1945 and projected outward to 2080 by Hennessey based on its historic growth. The yellow line shows federal spending as a percent of GDP. The chart makes clear that the level of federal taxation has actually varied little since World War II (which says nothing about how marginal tax rates faced by different groups have changed). You can see the last build-up of deficits that occurred from the 1970s through the mid-1990s. You can also see the build-up of the Bush years.

Historic Shortfalls The kind of budget shortfalls we are looking at in the future dwarfs anything we’ve ever seen. There are two ways to close the fiscal gap – cut spending or increase revenues. What Hennessey’s chart makes clear is that the level of taxation it would require to meet projected spending needs is far higher than anything the country has ever seen-slash-tolerated. Indeed, even closing half the gap through higher taxes would necessitate historically unprecedented taxation levels.

Progressives, in short, are going to be caught between a rock and a hard place: we will either have to find a way to convince the electorate to go along with massive tax hikes, with all of the electoral risk that entails, or we will have to come up with a plan to make equally massive cuts to entitlements that are likely to also be unpopular and that may do significant harm if not thought through carefully.

It’s true that the right will also be caught in this dilemma, but its situation is not quite as severe for two reasons. First, as the chart implies, their preferred path to fiscal sanity (spending cuts) starts off a much easier sell than tax hikes, given historical patterns. And second, the right has little programmatic interest in permanent spending hikes. The Reagan and Bush years showed that there is a constituency on the right for greater defense spending, but unless we really end up permanently at war with radical Islam, it can be expected that the Pentagon’s budget will rise and fall as global circumstances dictate. Progressive goals, on the other hand, such as greater federal education spending, expansion of child care assistance, more generous safety nets, and broader social insurance constitute costly and (ideally) permanent spending increases that will exacerbate the fiscal gap in the above chart.

The Upshot for Progressives What does this mean for the progressive agenda? First, it is vital that we prioritize our goals, a process that is going to require us to drop many of them, as difficult as that may be. Second, we need to come to terms with what “higher taxes” is going to mean in practice. U.S. taxation is actually as progressive as in Europe because we have taken so many families off of the income tax rolls. The added boost to raising taxes on “the rich” is much smaller than the revenue that could be raised by broadening the tax base so that we were not so reliant on upper-income families to pay for the benefits of government that everyone enjoys.

Third, we need to look for ways to achieve progressive aims that do not cost the federal government so much. That could include certain types of regulation, but it could also include a shift toward progressive cost-sharing in social insurance programs. Rather than trying to raise taxes to give people the benefits they say they want, we could move toward a paradigm where people gradually incur increasing costs of these benefits privately, forcing them to directly confront the trade-offs and efficiency concerns that social insurance tends to hide. Those with limited incomes could receive federal assistance but would still be incentivized to use benefits efficiently. (I will suggest what such programs might look like in future pieces here.)

Some progressives may object to the idea of progressive cost-sharing because it shifts costs and risk onto individuals. But they are going to incur the costs one way or another, whether through higher taxes or greater out-of-pocket spending. And given the impracticality of paying for future benefits solely out of taxes, risk is also likely to be privatized either way — whether by a thoughtful policy framework or through massive cuts in existing programs.

But let there be no doubt — the long-term prospects for significantly expanded progressive government are dim, and in fact, a retrenchment in coming decades is inevitable. President Clinton was wrong — the Era of Big Government is not over. But it will be soon. As progressives we must lead the process of winding it down in a responsible and fair way.
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The Morning After Health Care Reform: A Progressive Fiscal Wake-Up Call

11/19/2009

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(This is cross-posted from ProgressiveFix.com, the new online face of the Progressive Policy Institute, where I will be posting regularly.  Give 'em a look.)

Regardless of whether health care reform is ultimately signed into law — and momentum makes it increasingly likely, if far from certain — the historic passage of the House bill constitutes a remarkable legislative accomplishment. More than that, however, the bill would give millions of Americans health security. Under the status quo, the Congressional Budget Office estimates that 19 percent of Americans will be uninsured in 2019. The House bill would reduce that figure to six percent (see Table 3). It’s an achievement progressives should cheer.

That said, I’ve heard and read a number of critiques of the House and Senate bills that give reason for concern as well. Tellingly, these critiques have almost all come from outside the progressive community. The intra-progressive health care reform debate — make that the absence of a debate — has revealed a depressing with-us-or-against-us mindset that we like to think is only a conservative malady. But if health care reform is enacted in the coming months, progressives will need to focus sincerely on a problem to which they have paid only lip service over the last few months, one that reform is sure to exacerbate: the perilous fiscal health of the federal government.

The Grim Deficit Outlook I know — it’s soooo 1995 to worry about such things. But we face a serious problem, and despite the promises of reform advocates, the legislation being considered is not going to make it less severe. CBO projects the 2009 deficit to be 11.2 percent of GDP, which will put the federal debt held by the public at 53.8 percent of GDP (see Tables 1-2 and 1-6). Not since 1945 has the deficit been this big (see Table 1.2). Not since 1955 has the federal debt been so large (see Table 7.1). And all that understates the magnitude of the problem. If you take into account the net liabilities incurred in the federal government’s takeover of Fannie Mae, Freddie Mac, GM, and Chrysler, and the bank assets purchased as part of TARP, things look far worse — we could potentially be understating deficits over the next 10 years by as much as 80 percent.

Assume for the moment that health care reform does not pass. Deficits actually won’t look quite so bad in two or three years, but they will increase steadily thereafter (see Figure 1-2). Under realistic assumptions, the national debt will continue growing as a share of GDP — to roughly 100 percent by 2022 (assuming no losses on those recently purchased financial assets). That is worth restating: our current path will cause the federal debt to be as large as the entire annual output of the U.S. economy within a dozen years (see Figure 1-3). That hasn’t happened since World War II (Table 7.1). And while the national debt was roughly cut in half over the dozen years following the war, after 2022 the national debt would increase at an accelerating rate.

Now the first person to say that health care reform is deficit reduction gets a smack to the head. Yes, the growth in deficits and the debt over the long run anticipated by these projections will be due to rising health costs (see Figure 4-1). And yes, in addition to expanding insurance coverage, cost control has been widely cited as an objective for health care reform. The problem is, the bills under consideration have ended up not taking cost control seriously.

And for good reason, since real cost control under the delivery and insurance systems favored by reform advocates would have proved either too expensive or too intrusive to pass. Alternative systems, such as those envisioned by Sen. Ron Wyden (D-OR), might have been able to control expenditures through progressive cost sharing. (Under Wyden’s proposal, individuals would be subsidized on a sliding scale for the purchase of insurance from among plans that compete on price, with incentives for them to choose more cost-efficient coverage.) But the supposed savings in the House and Senate bills are fictions that reform supporters have been complicit in spreading.

The Illusion of Cost Control Consider the House bill. The CBO has to take the provisions in the bill at face value, even if they are highly unlikely to ever be implemented. Revenue to pay for the $1.052 trillion dollar gross cost of the insurance expansions comes from a number of sources. Roughly $460 billion would come from raising taxes on those with an adjusted gross income of $500,000 (individual) or $1 million (joint). At least $240 billion would be raised from Medicare cuts to providers (perhaps closer to $300 billion), about $170 billion would come from penalties assessed on individuals and employers for not complying with mandates, and $170 billion would come from reducing payments to managed care plans under Medicare. These and other changes would reduce the deficit over 10 years by $109 billion and could reduce the deficit slightly over the following 10 years.

Now, here’s where advocates — columnists, bloggers, even think tank researchers and economists — have drifted imperceptibly from pontificating to shilling. Put aside the strong likelihood that the Medicare provider cuts are dialed way back (if they are not, the administration’s own Centers for Medicare and Medicaid Services predicts that many providers will stop accepting Medicare patients). Put aside the fact that the “doc fix” to reverse most of the provider cuts that were already legislated for coming years will add $210 billion over this same 10-year period when it is passed. The bill’s purported deficit reduction of $109 billion is about two percent of the accumulated deficits from 2010 to 2019 (see Table 1-2). In other words, the House bill would barely make a dent in future deficits under the rosiest of interpretations — and is actually likely to increase rather than decrease them taking into account the anticipated adjustments.

What about the Senate bill? Harry Reid’s mash-up awaits CBO’s final word, but the Baucus bill would cover fewer people and therefore be slightly cheaper than the House bill. The bill’s insurance provisions have a gross cost of $829 billion over 10 years, paid for by a tax on high-premium private health plans (about $200 billion), Medicare provider cuts (about $160 billion), and Medicare managed-care cuts (about $120 billion).

Here, it’s worth noting the sloppiness of some reform proponents’ arguments over the wisdom of pursuing such an ambitious program despite yawning deficits. In a recession, they have argued, we cannot worry about deficits — greater spending is just what is needed to stimulate the economy. With the return of growth, we will have little problem dealing with deficits later.

But the Baucus bill’s 10-year deficit reduction of $81 billion would be achieved by spending essentially nothing in the first four years (from 2010 to 2013). Needless to say, if we still need federal economic stimulus in 2013, we will have bigger problems than deficits.

The effect on deficits is basically neutral for the following six years (see Table 1). Nevertheless, CBO does estimate that the Baucus bill would continue to produce small savings in the second 10 years. Of course, if the Senate follows the path the House is taking, it will include a “doc fix” that will wipe out even these dubious savings.

Why Progressives Should Care About Costs Meanwhile, all of the magic bullets (the “game changers”) that progressives trumpeted, from the public option to comparative effectiveness research, to IT improvements, to a Medicare Commission that would propose cuts would produce negligible savings in the foreseeable future, according to CBO.

There were “strong” versions of several of these proposals that could have produced cost savings, but they proved too strong for legislators to risk their jobs for. What progressives will get out of health care reform instead is what most really wanted: near-universal coverage.

A worthy goal, no doubt. But if progressives fail to get serious about fiscal responsibility, the consequences — whether in the form of another financial crisis, slow or stalled economic growth, or political abandonment by the sons and daughters of the Perot voters — could undo much of the good that may yet come out of health care reform. Think it has been hard to pass reform? Try raising taxes dramatically to protect it down the road.
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