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More than cutting and taxing

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Tim Fernholz has a smart column exploring what a progressive take on deficit reduction looks like. According to the experts he talks to, "the key is framing the conversation early: Deficit reduction needs to be about both increasing revenues and cutting unnecessary spending."

This is, I think, wrong. Or at least insufficient. It is extremely difficult to imagine that we'll get deficits under control by cutting spending and raising taxes. Health-care spending -- the driver of our deficit problem -- is simply moving too fast. Imagine pretty severe Medicare cuts that chopped the program's expenditures by 10 percent in 2011. Assuming the normal growth rate of seven percent, we'd be back to square one within 500 days or so.

To think about this more clearly, reasonable people agree that we have to use fewer fossil fuels. In the short-term, that means more efficiencies that make the fuels less necessary and more taxes that make the fuels more expensive. But in the long-term, it means a different energy source than fossil fuels, and our short-term policy is aimed at accelerating the technological advances that will make that possible.

So too with the deficit. Cutting spending or raising taxes might be a stopgap measure, but the eventual answer is going to have to be changing the driver of that spending. We're going to have to get the cost of health care under control, not just by reducing our spending, but by changing the way medicine is practiced, bought, and sold. Either the health-care system eventually starts growing at five percent a year rather than nine percent a year or we go bankrupt. Those are our choices. And they mean that we're going to have to accept much more severe and intrusive reforms in the coming years.

By Ezra Klein  |  January 7, 2010; 1:03 PM ET
Categories:  Budget  
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Comments

So why the Cadillac tax? It will hurt a lot of middle class families and won't change the way medicine is practiced--at least not by the specialists who control 80% of health spending.

Posted by: bmull | January 7, 2010 1:17 PM | Report abuse

Not necessarily true. The cad tax, in theory, will move people towards more managed care options (think Kaiser Permanente, say) that actually do change the way care is practiced. The point of the tax isn't that people pay it. it's that they avoid it. And in avoiding it, we get some of the cost pressures medicine needs to change the way it functions.

Obviously, the cad tax isn't the only thing we'll need. It's worth trying, though. But there will be taxes -- and spending changes, like a global budget that Medicare sticks to -- that can be used as tools to change the way medicine works.

Anyway, more on the cad tax later today.

Posted by: Ezra Klein | January 7, 2010 1:25 PM | Report abuse

What do you think about Jon Walker's ideas for improving the healthcare excise tax? I understand that you really like the idea, but can you agree that it's not being planned to be implemented correctly and that it will cause much more pain than it will be worth. Also, the inevitable pain built into the current structure makes it more likely to be avoided as the dreadful AMT is now. That would make the tax painful and useless.

I really hate the excise tax as it stands.

Posted by: eRobin1 | January 7, 2010 1:30 PM | Report abuse

It would be nice, given all the uproar over the cadillac tax, if the Senate would simply go back to the original approach of ending the employer-based tax exemption. The cad tax does nothing to improve on it, in terms of politics or economics. But we won't have cheaper healthcare in this country - or any increase in median wages - until the tax exemption is overturned.

Posted by: wheatthink | January 7, 2010 1:48 PM | Report abuse

"we go bankrupt."

As the monopoly provider of a non-convertible floating fx currency of issue, the US need never go bankrupt, become insolvent, lack cash-flow, or default on obligations denominate in its own currency. As currency issuer the monetary sovereign is not financially constrained. It constrain itself voluntarily though political means, such as legislated offsets (taxes or borrowing) for deficit spending, but this is not a financial necessity.

The only constraint is real, relative to nominal aggregate demand and real output capacity. As long federal deficit spending does not result in the increase of nominal AD in excess of real output capacity inflation will not result. If NAD is under that necessary to support real output capacity, then deflation, economic contraction and unemployment will result (like now). Thus the monetary job of the government is to balance NAD and real output capacity.

As long as real output capacity includes health services, the US can always afford to fund health care through deficit spending without causing inflation. This argument is bogus and progressives should not be falling for it.

Posted by: tjfxh | January 7, 2010 1:51 PM | Report abuse

...but workers have to be fairly compensated for the loss of the tax exemption. Wyden proposed letting them take the present value of their benefits as untaxed income for as long as they hold the job. That's a level playing field that doesn't penalties unions. There are other ways to do it as well.

Posted by: bmull | January 7, 2010 1:55 PM | Report abuse

Getting back to Ezra's comment, if the Cadillac tax is so good for KP, how come I never heard George Halvorson support it? Could it be that he knows it will lead to healthy people choosing HDHPs (blech!), and KP can't compete with HDHPs?

Most consumers are already sensitive to premiums because they pay some or all the cost. Why add an additional tax which penalizes unions, sick people, and those in high cost areas? The only explanation is that, despite the denials, this is a revenue provision. And if that is true, then it's a campaign promise-busting middle class tax increase.

Posted by: bmull | January 7, 2010 2:46 PM | Report abuse

I think you're right Ezra, but in your example you don't factor in Fernholz' expected higher taxes. Also, higher taxes coupled with 2-3% GDP growth--who knows, we may see it again--will generate even greater revenue and begin to close the deficit gap even faster, as it did in the Clinton years.

Posted by: andrewlong | January 7, 2010 2:58 PM | Report abuse

If you want to avert national bankruptcy, don't dick around with health care. Cut the bloated military. We simply don't need this level of empire. It in no way serves the interests of most of us.

What happened to that peace dividend anyway? And don't try to tell me a bunch of terrorists in caves requires this level of military spending. That is simply nonsense.

Posted by: janinsanfran | January 7, 2010 3:10 PM | Report abuse

Okay Ezra, we hear you. So can I request 4 grade letters from you? Please rate following HCR bills in terms of addressing (not necessarily solving fully but at least good start and not creating more problems) this longer term 'time bomb':
- Senate Finance Committee HCR Bill
- House Bill
- Senate Bill
- Eventual Bill passing into Law? (That will come later.)

Seriously, is it not incumbent upon you to render your judgment in nut shell? Which one is A, B, B+, C or D? Anything A+?

You may thing this is not going to do the justice to the issue. That is right. But at the end as common voters, we need to know what is the ball park 'worth' of this bill from 'long term cost control' perspective by a leading commentator on this topic.

Posted by: umesh409 | January 7, 2010 3:33 PM | Report abuse

WaPo today has a nice article on the Cadillac tax, which I'm sure Ezra will address at some point.

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/06/AR2010010604931_pf.html

But notice that Jon Gruber defends the tax with a straw man defense: just "because it won't cause efficiency in every case, we should therefore not do it, is a dumb argument."

I want to hear a real defense. I can think of many examples of wasteful spending which the Cadillac tax won't help. I can't think of any situation which couldn't be handled better without so much collateral damage.

Posted by: bmull | January 7, 2010 3:34 PM | Report abuse

Consider some innovative possibilities for future health care. Health is pervasively important to each of us as individuals hence the imperative. Recall the saying, "If you have your health you have everything". I predict machines will replace people for more and more of our care thus driving down cost and improving outcomes. Just like our factories. Nobody operates machines by hand anymore. They run themselves. People just "attend" to them. The same thing is coming to medical diagnosis and treatment. We'll have "tricorders" to instantaneously diagnose and "nanobots" for treatment. The current strife over health care adds impetus.

Posted by: BertEisenstein | January 7, 2010 4:18 PM | Report abuse

We could always take on the Catholic Church with its insane new "Medicare should keep every one of our people alive forever--no one dies in a Catholic Hospital" policy.

Posted by: Mimikatz | January 7, 2010 5:25 PM | Report abuse

I agree completely; we must get health costs under control or we're bankrupt. This means keeping people healthy, which is different from treating sick people so they don't get worse or die prematurely. Simply put, the overwhelming majority of disease in this country results from the typical American diet, which is high in carbohydrates, gluten, and polyunsaturated plant oils. Change the way people eat and virtually all components of metabolic syndrome--heart disease, obesity, type II diabetes, hypertension--as well as autoimmune disease, disappear. People stay healthy and there is no need to spend ridiculous amounts of money trying to treat preventable disease. That's how you control costs. People need to eat more saturated fats, moderate protein and low carbohydrate. That means more grass-fed beef and pastured chicken, lamb and pork; more full-fat dairy, including whole milk (raw cow or goat milk is best) products; more eggs from pastured chickens and more fish. Stop using sun screen and boost your vitamin D (which lowers the risk of virtually all cancers and heart disease and boosts your overall immunity). How do we get there? First, stop all agricultural subsidies for corn, wheat, and soy; these are worthless crops that only contribute to poor health; take that money to promote animal grazing and vegetable farming. Right now only 5% of agricultural land is used to grow vegetables. The benefits include better health, lower health care costs, economic development of our rural areas, improved environmental stewardship of the land, cleaner water, and, of course, good food.

Posted by: johnsonr1 | January 7, 2010 7:38 PM | Report abuse

"Either the health-care system eventually starts growing at five percent a year rather than nine percent a year or we go bankrupt." Never can follow this stuff. Change the industry and it becomes gibberish: "Either the IT industry (entertainment industry, fast-food industry...) eventually starts growing at five percent a year rather than nine percent a year or we go bankrupt." This will only bankrupt us if the government insists on spending the money, or forces a setup where regular people have no choices but to spend it. Otherwise, the rest of us will do what we always do when we have to pay for things: Decide what to buy and what to forgo.
Is someone claiming that the same level of care is going up 9% a year? That the price of an hour's consultation with a pediatrician is costing more? That an x-ray is costing more? That a glucose test is costing more? Things are costing more because there are a lot of new things to pay for these days. Hopefully they improve outcomes - I'm certain that most of them do. If they don't, we need to find ways to enable people not to pay for them.
You-all sound like a character from an old horror flick: Stop me before I spend again!

Posted by: MikeR4 | January 8, 2010 11:16 AM | Report abuse

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