The health care costs budget fallacy

by on May 12, 2009 at 5:19 pm in Economics | Permalink

Today's report is this:

The financial outlook for Medicare and Social Security
has significantly worsened, as the bad economy and mounting job losses
have pushed both programs years closer to insolvency, according to a
grim report issued Tuesday by the Obama administration.

Maybe you once argued that "Social Security is fine," but dollars are fungible and the budget must be judged as a whole.  The consumption tax is coming, I am sorry to say.

I'm seeing nascent signs of a new (but actually old) fallacy, namely that since health care costs can (will?) crush the budget, we don't have to worry so much about other expenditures.  The mental story runs something like this: "if we don't cure health care cost inflation, it doesn't matter; if we do cure health care cost inflation, we can afford it."  That's exactly the kind of false mental framing that behavioral economics identifies as irrational in other settings.

Here is some stupid TV.

Elsewhere, Richard Posner makes many concessions.  I do not disagree; it's a mistake to think that a political movement can be very smart, especially after extended years in power.

Ian May 12, 2009 at 5:31 pm

I just noticed you use two spaces after each paragraph. you should stop. it’s unnecessary and looks bad. you’re not using a typewriter here.

Curt Fischer May 12, 2009 at 5:47 pm

Ian, I think you meant sentences, not paragraphs. And if you did, I disagree with you. What’s wrong with two spaces? It looks better than just having one in my eyes.

Laocoon May 12, 2009 at 5:59 pm

How is a consumption tax NOT the final nail in the coffin of consumer demand? It seems to me that taxing consumption is a disincentive to consume, ergo, more demand destruction. As a baby boomer who has actually saved a lot of after-tax dollars, I see double taxation here, plus a major changing of the rules. It was risky enough to max out my 401k and IRA, because the tax rate at retirement would be uncertain, but now a proposal to tax consumption (all my outgo will be consumption, with no income) will really force me and other retirees to cut back substantially. Wouldn’t that really be a negative factor for GDP??

mk May 12, 2009 at 6:25 pm

The mental story runs something like this: “if we don’t cure health care cost inflation, it doesn’t matter; if we do cure health care cost inflation, we can afford it.” That’s exactly the kind of false mental framing that behavioral economics identifies as irrational in other settings.

To me this is just priorities. You focus on the thing that will crush the budget. Is the irrationality that by focusing only on health care we are not considering a composite reform of Medicare and Social Security?

torris187 May 12, 2009 at 6:40 pm

I read a great paper a last year about the innefencies of the healthcare industry. According to the paper, about 60% of healthcare costs are administrative costs (the people at the front desk, managment). The point of this paper, was that if we shift the healthcare industry into one giant building (say a Costco or a Sam’s Club of healthcare) the price of healthcare would drop considerably, the paper suggested up to a 30% drop in healthcare prices.

If anyone has ever gotten sick, they know the extreme hassle of going to 15 different testing centers and doctor’s offices, imagine if all of those doctor’s offices and testing centers were in one place, also, the phamarcist could be in that building as well, instead of in the grocery store. It would sure cut down on rent costs and administrative costs.

I think this would be a more practical and innefecient solution than to simply fund an inneffecient industry.

Andrew May 12, 2009 at 6:55 pm

Tyler uses extra spaces to starve the beast.

Steve Bainbridge May 12, 2009 at 7:06 pm

As for Posner, the trouble with Yglesias’ piece (and it’s a trope that’s bound to be repeated elsewhere on the left) is the claim that Posner is “definitely a political conservative.”

Posner may have been a Reagan appointee, but you can’t go by that (Eisenhower, after all, appointed Warren and Brennan). Posner may have been affiliated with the market-friendly wing of the law and economics movement, but you can’t go by that either.

The bottom line is that Posner is not now and never has been a conservative in any meaningful sense of the term. I addressed this issue a long time ago, concluding that Posner’s documented record puts him in opposition to virtually every major conservative principle.

carping demon May 12, 2009 at 8:32 pm

“Maybe you once argued that “Social Security is fine,” but dollars are fungible and the budget must be judged as a whole.” And if you don’t mention Defense, Drug wars, bail outs and border “protection” when you discuss those fungible dollars, then this sounds like just one more attack on Social Security, about the only social program the US has done right in the last seventy-four years.

Doesn’t a VAT assume that some value is being added somewhere? Or is it enough to just make it up?

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coberly May 12, 2009 at 9:53 pm

“dollars are fungible”

the motto of embezzlers everywhere.

James May 12, 2009 at 11:47 pm

Oh come on Tyler. Really stupid TV is this:
http://www.youtube.com/watch?v=2ndx_IdlUQU

Jim Glass May 13, 2009 at 2:27 am

Fixing Social Security to close its coming financing gap of 2 points of GDP — a *big* amount by all historical budget measures — is very doable. All the options have been analyzed to death, all that is needed is the will to actually adopt one of them or some mix of them.

But to most left-side partisans this is anathema — so they’ve adopted the line that “rising health care costs are what’s going to crush the ecomomy, so leave Social Security alone when its cost matters so little.”

Alas, rising health care costs aren’t what’s going to crush the economy. They dominate in the long run projections, 50 to 75 years out, but the short run of 20 to 30 years is what’s going to kill these programs as they are, making all 75-year projections moot (absurdly so!).

Because it is by 2030 that income taxes will have to rise by >50% (or some equivalent like a VAT will have to be adopted) to pay for these programs — which ain’t going to happen without major program re-writes to cut their cost.

And in the 21 years to 2030, it is not the rising cost of health care but the rising number of retirees — i.e., Social Security and health care at today’s price — that will drive that 50% tax increase.

To paraphrase Butch to Sundance, it doesn’t matter if we can’t swim to the 2080s, the fall to 2030 is what’s going to kill us.

Robb Lutton May 13, 2009 at 7:23 am

Back in the late 19th century, the federal government spent little on arms, social security, or medicare.

Today, we feel a need to spend a lot and that leads to taxing a lot more. There is no particular reason why that process should stop. Why else would we aspire to increase GDP except to spend it on stuff.

I for one am glad to pay more taxes on my growing income to pay for better and more expensive health care. Obviously we would all like it to be more efficient and all. But mostly we want cures, even if they are expensive.

NOTE: It is generally accepted that the proper typographic usage is to put a single space after a period. This is to even out the white space between each word. The period itself is visually much less dark than a regular character and by putting a period and a single space there is sufficient white space between sentences. With two spaces there is too much space.

Dan May 13, 2009 at 9:16 am

Jim- even just looking at the next 30 years, the aging population causes less than half of the increase in projected SS/Medicare/Medicaid costs. The rest comes from rising health care costs (and the interaction of the two). See here for graphs (from February). What’s more, health care costs outside of Medicare/Medicaid will increase by even more than SS/Medicare/Medicaid over that same time period.

gnat May 13, 2009 at 4:10 pm

“dollars are fungible”

You are thinking of trust funds like the highway fund where the government dips in for funding on-budget activities. If we apply the same logic to any government sponsored trust fund–such as your 401K or my TSP then you and I both would justifiably object. In fact, the treasury sometimes dips into my G funds and leaves me an IOU (to avoid public debt) eventhough these funds represent 100% of my savings from income. The difference between these government trust funds and the SS trust fund is that the latter is designed as actuarial insurance rather than as direct contributions-savings. If SS contrbutions do not cover outlays then either contributions have to rise or outlays have to be reduced.

carping demon May 13, 2009 at 5:39 pm

“will have /to/ be solved”

Narconon September 7, 2010 at 8:18 am

Health care is not something that you can toy with. The government is actually thinking about limiting health care accordingly to your income. If you are poor and don’t have money, you can die… If you are rich and afford expensive treatments, well, you will be treated as a king. Narconon

BabyGirl September 29, 2010 at 12:25 pm

My opinion is that health insurance should never be entirely a private business because that can cause a lot of problem. A private owners wants to make profit and thinks little about the person that needs the health coverage. Vista bay

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