The Last Thing You Will Ever Need to Read On Spending, Taxes and Health Care

Jennifer Pollom has a long piece up at Economics 21, which argues that long term spending, not taxes are the problem. By my reading Pollom makes three big points

• Revenues, even after accounting for the Bush tax cuts, are not that far out of line with historical norms.
• Spending on the other hand is growing like gangbusters
• The core of the spending problem is Health Care

Pollum also makes some important comparisons, noting for example that tackling spending growth without touching entitlements would require either scrapping the military or scrapping the entire rest of the government. In fact, even the latter wouldn’t completely do the trick.

Here core argument is essentially correct but there are some important caveats to be made.

First, Pollum, like just about everyone else, leans heavily on this set of graphs.

You see that last date over there in the right-hand corner. If you squint you can make it out. It says 2080. That’s 70 years from now. I know what you are thinking. However, I have to keep making this point: a whole lot can happen in 70 years.

Seventy years ago Hitler had just starting bombing British factories, but the America First Committee was determined to ensure Roosevelt kept his pledge to keep us out of war.  They had good reason to be hopeful, after all public support was with them.

A year later that hadn’t turned out as expected. The next 70 years held a lot of surprises as well. The birth of the modern welfare state, the baby boom, Women’s Lib, the Civil Rights movement, the rise and fall of communism as a geopolitical force. I could go on.

The point is American life and Americans’ relationship to their government changed in ways that experts in the 1940s could not have imagined. It is hubris beyond all measure to think that these projections are even a semi-precise portrayal of what is going to happen. We have to always keep that in mind.

Second, this whole Health Care thing. It’s really a ball of knots. However, there are a few things we just have to keep straight.

To start with, the spending issue on health care isn’t a government issue. Its a national issue. Its really a global issue, but we don’t need to go there. The whole country, public and private is being squeezed by the rising cost of health care.

Now you might say, yes but if people were given responsibility for their own health care expenditures they would make more rational choices. The problem is, people have never had responsibility for their own health care expenditures and there is little reason to think that they ever will.

One reason is obvious. The people who are in most dire need of health care aren’t in any condition to be responsible for anything. That’s why they need health care. Second, their loved ones typically aren’t in the most rational state of mind either. In fact, Robin Hanson makes a fair argument that the entire notion of health care is rooted in emotion and fear.

However, even beyond that health care has always been mostly paid for by someone else. Even before the government got into the business of explicitly buying most of the health care in the United States,  health care was actually paid for by insurance companies.  In fact, it is from the study of insurance companies that the notion of moral hazard arose.  The problem people noticed was that when people were spending the insurance company’s money they tended not to be so careful about what they bought. Rascals, I know.

That’s basically the same problem that we have with government. The fact that you have a private entity creating moral hazard doesn’t do much to change its fundamental properties.

We could go back even further, before the rise of medical insurance, and we’d see that most health care was bought either by the local governments, the military or the church. Again, most people were insulated from the cost.

Now, we could say that Health Savings Accounts will solve all that, and in truth they’re not a bad idea. However, they’re not really a solution either. Half of all health care dollars are spent by the sickest 5%; people who would blow right through their HSA caps. The bottom 50%, that’s most of us, account for less than 3% of all spending.

So what’s my takeaway? Its that whether the government buys health care or whether the private market buys health care is not likely to change the fundamental dynamics. Most people don’t make their own fee-for-service decisions, they never have, and they probably never will.

However, there is a bright side, which is this: something that can’t go on forever, will stop. I stole that little gem from Ben Stein’s dad, in case you didn’t know. In relation to health care what that means is that I don’t expect excess cost growth, that is health care cost growing faster than the economy, to go on forever.

Literally, it can’t go on forever. Eventually health care will be the economy and then the two numbers by definition have to match. However, even before we get to that point someone is likely to balk. What we would love to see is a bunch of rational agents, each calmly and carefully deciding exactly how much of their income they are willing to fork over. But, like I said above, that ain’t gonna happen.

What we will see is a national freak-out. One in which all sorts of caps and legal constraints are placed on the growth of health care costs. If we someday have a single payer system this will be done quietly behind the scenes as is now happening in Canada. If we still have a mutli-payer system then its going to be a political firestorm but the end result is going to be the same. Artificial constraints will be placed on the growth of health care costs.

What that means for that big CBO graph is that health care costs are almost certainly not going to keep rising at the same rate for the next 70 years. Something is going to stop them.

So what’s left to be done. Am I saying that we just put Alfred E. Neuman at the helm and forget about it?

No.

There are some important choices to be made. For example, when the clampdown comes we want it to come in such a way that minimizes inefficiency and leaves open the potential for some technological advances to continue. This will not be an easy task, as our most potent tool, the decentralized free market, is not available. However, it is an important task and one that we should begin thinking about.

Oh, and I lied. Turns out I’m a rascal as well. There is a lot more to read on spending, taxes and health care. We haven’t even talked about taxes for example. But, I had to get you through this monstrosity of a post somehow. I couldn’t very well depend on your rational informed consent could I?