Network News

X My Profile
View More Activity

Cutting spending and raising taxes won't save us


David Leonhardt, in a very sensible column, says that reducing the long-term deficit will require both spending cuts and tax increases. But I've come to question this view, or at least its framing. It will be reforms, not increases or cuts, that will be necessary to close the long-term budget deficit.

Our long-term deficit is not a function of our current spending, which is manageable. It is a function of our expected spending growth, particularly in health care. With the system growing at 8 percent a year and GDP growing at 2 percent or 3 percent a year, there's a real long-term problem there. But you can't cut, or even tax, your way out of it. If you cut 5 percent from the system in one year, that cut disappears by the next year.

The fundamental problem here is the ratio between GDP growth and spending growth. If the two are in line, we can keep up. If not, we can't. The only solutions that will work in the long term will be those that either increase our rate of GDP growth or decrease our rate of spending growth. That's why I like to say that after we pass health-care reform, we're going to need to pass health-care reform. Unless you can bring the sector's growth under control, there's no way to get the deficit under control.

But if you can bring our costs more in line with international norms, the deficit problem disappears entirely. That's what you're seeing in the graph atop this post: The orange line shooting upward is our projected deficit. The other lines gliding downward are our projected deficit if we had the per-person health-care costs of other countries. But we're not going to get there, or near there, by cutting. We can do it only by reforming.

Graph credit: CEPR.

By Ezra Klein  |  March 18, 2010; 10:36 AM ET
Categories:  Budget  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Another way the CBO score helps the Democrats
Next: Health-care reform and women


Spending growth rate and it's ratio with GDP growth rate as real culprits of the deficit - this a smart take by Ezra. Naturally 'reform' is the answer. Quite right Ezra.

So now we have the basis for 'reform party manifesto'. Who wants to claim this mantle? Dems or GOP or Tea Party? Signs are not encouraging so far. If HCR is passed (with latest CBO projections intact), Dems can argue that they are on that road. That will not be a bad start contrary to all the noise, chaos, obstruction and threats to 'repeal' from GOP.

Posted by: umesh409 | March 18, 2010 10:48 AM | Report abuse

How do you respond to James Galbraith's arguments in "In Defense of Deficits"? Specifically, he asserts, "until we have effective financial reform, public budget deficits are the only way toward economic growth. You don't have to like budget deficits to realize that we must have them, on whatever scale necessary to restore growth and jobs. And we will need them not just now but for a long while, until we've shaped a strategic program for investment, energy and the environment, financed in part by a reformed, restored and disciplined financial sector."

Posted by: bill0465 | March 18, 2010 10:59 AM | Report abuse

A quick calculation:

The UK NHS planned on spending 1,774 pounds per resident for 2008-2009.

The current dollar/pound exchange rate is 1.535, an amount I'm presuming isn't too far from purchasing power parity.

So the UK NHS is spending $2,723 per person to run the system.

With approximately 308 million residents of the United States, an NHS system here would run on the order of $839 billion, or 5.9% of 2009 GDP.

It is hard to find precise amounts for all levels of government, but according to wikipedia, between 45% and 56.1% of U.S. health care spending is publicly funded. Since U.S. health care spending is around $2.5 trillion, and 45% of that is just over $1.1 trillion, we are spending more public dollars on care than if we simply had a government run system open to all comers. In other words, we could ramp up a system of public providers, set the funding as a % of GDP at 6.0% now and forever, and fund the system now and forever with a 15%-18% VAT (depending on what proportion of GDP is hit by the VAT, 15% requires 40%, 18% requires 33%). Our future deficits would melt away, we'd have universal access to healthcare, and we'd save money.

You could set up the system as 53 provider networks (50 states, D.C., Puerto Rico, and other territories) and distribute a base amount per network with the remainder distributed on a per capita level. Each governor (or mayor) would select a CEO for the system with a set term. A National Health Board would set a small set of health goals (minimize hospital infections, minimize death reates to diseases amenable to treatment, patient satsification with the system), and would allow each system to compete in order to best meet these goals, with the very best management teams (say top 5 or top 7 in terms of absolute performance and improvement) being paid like private corporate managers.

Under this system, providers could still operate as private entities, and people could still see those private providers. We'd lightly regulate insurance, mostly to limit the dumping of policyholders who became sick into the public system. People who wanted to use this system could use health insurance or their own savings - insurance benefits would of course be taxable. Instead of means testing subsidies, people would means test themselves into and out of the public system.

I'd be much happier with this system than the Byzantine patchwork of reforms we are currently seeing.

Posted by: justin84 | March 18, 2010 11:06 AM | Report abuse

That sucking sound is all care providers and drug and device manufacturers leaving the room.

Posted by: eRobin1 | March 18, 2010 11:16 AM | Report abuse

So, sometime in the next 72 hours, why don't you explain precisely how the health care reform bill will actually accomplish the task of reducing spending.

Does it eliminate the absurd tax break for employer-provided health insurance? No.

Make any substantial changes to the health care market? No.

Reduce subsidies? Ha ha? Very funny!

Posted by: ostap666 | March 18, 2010 11:17 AM | Report abuse

WOW. And imagine if we actually did something crazy like capitation for providers, lower the period to generics for biologics from 12 to 5 or 7 years. I'd love to see THOSE projections.

Posted by: visionbrkr | March 18, 2010 11:20 AM | Report abuse

In other words, I completely agree with Ezra that its not a simple amount of cutting funding. The structure of the program itself makes funding cuts ridiculously difficult.

We have a system in which public health care spending grows rapidly year in and out, regardless of what is going on with public revenues. If we believe as a society that people are entitled to health care (and legal requirements to provide emergency care to the uninsured and medical programs to cover the poor and elderly suggest that we do), then we should set aside an affordable amount of money to help those people.

Instead of having a series of entitlement programs, and try random ad-hoc fixes to reduce the cost of care, we should instead have a system which sets an affordable amount of money to be used for healthcare, and the system then tries to maximize health outcomes for those who use it.

Posted by: justin84 | March 18, 2010 11:20 AM | Report abuse

Controlling costs means someone(s) gets less than current projections would allow. That's unAmerican! As long as we have a culture that believes that people are entitiled to whatever profit they can make, we won't control health care costs significantly.

Of course the biggest savings would be in end-of-life care. Keith Olbermann described a conversation with an EMT who spent his days shuttling patients around who couldn't express their wishes about end-of-life care and had left no advance directive. So they were given procedures they might not have wanted. I'm not suggesting pulling the plug on Granny or Pop, but there a great deal of expensive care is given atthe end that is neither palliative nor curative. But this is a discussion that we can't have as long as there is political advantage to be made from making a private decision into a political football.

Posted by: Mimikatz | March 18, 2010 11:22 AM | Report abuse

"The other lines gliding downward are our projected deficit if we had the per-person health-care costs of other countries."

This doesn't seem to square. First off, we're not going to have the "per-head" costs of other countries regardless of the reforms. Second, if these other countries have health care costs growing at an excess of GDP, much like we do, how is their deficit decreasing?

Posted by: BeatKing11 | March 18, 2010 11:25 AM | Report abuse

@justin:we are spending more public dollars on care than if we simply had a government run system open to all comers. In other words, we could ramp up a system of public providers, set the funding as a % of GDP at 6.0% now and forever, and fund the system now and forever with a 15%-18% VAT

Why do we need a VAT if our present govt provides enough support to cover everyone using a hybrid NHS Canada system right now?
Why not just redirect the money we spend now into a rational, universal, not for profit system, except for VA funding which is already the most efficient delivery model we have in the US. If we added a small % of our current premiums to the total to make up for VA spending, there should be plenty of money to make this happen. It won't of course because any plan like this is a socialist, fascist, communist, big government, unholy, risky gamble, guaranteed to fail, intrusion into our totally functional health care free market system...sigh

Posted by: srw3 | March 18, 2010 11:27 AM | Report abuse


That's a great point and I admittedly didn't watch Keith every day but didn't he use what some may term "extrordinary means" for his father?

Its easy to say that you won't whether it be for cost or any other reason but in practice I'd expect its very hard.

Posted by: visionbrkr | March 18, 2010 11:41 AM | Report abuse

What Mimikatz said. What rational country would spend more than 1/2 of total health care dollars a person uses in his/her lifetime in the last 2 years of life? Wouldn't their total quality of life throughout their lifetime be better if that money could be redirected to help them be healthier while they are younger and more active?
Reason 1, most of this is medicare spending so individuals don't directly pay money for this service, they pay medicare taxes that funds it. There is little financial feedback to influence the decision to continue treatment. This is a good thing because it means decisions are made based on the patient's condition, not an individual's ability to pay. This is a bad thing because people don't see the tradeoffs that are made when care is lavished on a dying person. How many vaccinations, pap smears, colonoscopies, dental checkups, etc. could be done with the amount of money it costs to keep someone alive in the ICU for a few days at the end of their lives?
Reason 2, this kind of talk brings out the death panel, pull the plug on grandma crazies who counter rational arguments about allocating healthcare dollars with hysterical fearmongering and Terry Shaivo style politics.
Reason 3, these are had emotional choices. If advanced directives are not left or specify doing everything humanly possible, then asking relatives or guardians to make the decision for someone who can't make it themselves is a huge emotional decision to put on them. No one wants to be seen trying to save money by killing off a relative, even if it makes sense to stop pouring an endless stream of money without improving health outcomes or quality of life.

Posted by: srw3 | March 18, 2010 11:44 AM | Report abuse


Keith Olbermann (to my understanding) didn't limit the care his father got at the end of his life.

If an insurance company said to him, "Mr. Olbermann I'm sorry but there is no hope for your father getting better, we're just going to let him go peacefully" how would he have taken that?

You can't convince me that he wouldn't be all up in arms screaming "the insurers are death panels". He's done it already even when the facts don't support it.

Posted by: visionbrkr | March 18, 2010 11:50 AM | Report abuse

@ ostap666 Does it eliminate the absurd tax break for employer-provided health insurance? No. Make any substantial changes to the health care market? No.

Well, as long as repiglicans suggest that any changes to the current system represents a socialist, fascist, old people killing, health care rationing, plot to destroy america, none of these things can be touched.

The reason the Dems only nibbled at the edges of say the employer healthcare tax exemption is that their political opponents demagogue the issue to paint dems as unamerican communists out to destroy america. And change the health care market? Secret socialist plot to turn the US into North Korea!!!! Markets good, rationality in policy, BAD!!! Markets solve all problem if only dems didn't want to use big government to regulate them to death. Well, you get the picture.

At some point, we are going to have to bite the bullet and start making tough choices about where we allocate health care dollars, but we can't even say that we want to just cap the % increase in health care spending, let alone stop the growth, without being pilloried by crazies. As long as people believe that there is unlimited money for treatment, the problem gets worse. The first step is to say that all health care spending can only be X% of GDP in any year and of course, cue the death panel hysteria from repiglicans. We can't even get that far.

Posted by: srw3 | March 18, 2010 11:57 AM | Report abuse

@VB: I didn't even mention KO, so I don't understand your point. And besides, wasn't Keith's dad covered by medicare (mostly) and not private insurance (probably some supplemental coverage)? So it would be a govt death panel mostly ;-). See my reason 3 above on this. Besides, we already ration health care by ability to pay, (at least until medicare kicks in, and it has substantial copays). It just so happens people like KO and Obama have the resources to even get to make that kind of choice.

But VB, it is your repiglican buddies that are constantly screaming death panels and evil govt rationing anytime some kind of sensible allocation of health care dollars over a person's lifetime is suggested. Even an overall cap on health care spending is whisking the US into the abyss of socialism according to rightwingnuts. Repiglicans don't have a monopoly on demagoguing health care, dumbocrats do it to, but the vast majority of criticizing any kind of change and therefore supporting the unsustainable status quo comes from rightwingnutistan.

Posted by: srw3 | March 18, 2010 12:06 PM | Report abuse

"That's why I like to say that after we pass health-care reform, we're going to need to pass health-care reform."

It's going to make it even more important. By throwing more people into pre-paid style plans, we are putting gasoline on the fire with this health care plan.

We might just end up keeping the taxes in and changing the structure of the benefits to include something more on the HSA axis before it is implemented.

Posted by: staticvars | March 18, 2010 12:07 PM | Report abuse


they're not my buddies first off. As far as KO i was referring to Mimi's point and your response to hers.

And to my understanding he did have an advanced directive (i believe he said this on one of his shows) but was it used? Maybe we'll find out, maybe we won't. The point is when you demonize a group in this discussion whether it be insurers, democrats, republicans we all lose. You're right there are finite dollars and we need to find a way to spend them wisely. To date we're not doing that. Does this reform help that? no, not really. I'd point you to a Politico article from the architect of the MA reform.

Each of these maladies can be cured, if state officials recognize the limitations of top-down government solutions. Instead, as former Gov. Romney said, the health care sector must be exposed to free market forces and the consumer should be the organizing principal in any reform.


Read the article. Ezra won't both to post to it on here I fear but this is where we'll be in 5-10 years irregardless of the talk of "deficit reduction".

Posted by: visionbrkr | March 18, 2010 12:18 PM | Report abuse


Well no, it wouldn't need a VAT per se. Any sort of funding, including existing funding sources, would work.

I guess in my mind I was trying to offset conservative and liberal concerns. Conservatives would like that entitlement programs are over (and I'd imagine they'd want the 6% of GDP spending limit set in stone, perhaps as a constitutional amendment), but they probably wouldn't enjoy having a massive system of public providers. Conservatives are typically allergic to people receiving benefits that they contribute nothing towards, and they prefer consumption taxes to income taxes, hence the VAT (although I am aware a lot of conservatives don't much like the VAT). The structure of the program in which you have state by state competition with CEO-style management/compensation and the maintenance of a private system outside of the public system with minimal regulation are also designed to appeal to conservatives.

Liberals meanwhile get a system of public healthcare providers that would get 6% of GDP, all of it immune to the profit motive. The downsides for liberals is obviously that the funding limit is fairly low, and possibly also the lack of top-down management (e.g. if we find that what Vermont does works well, why can't we just impose it on the Texas system, etc.).

Outside of that, more tax revenue is a hedge against future deficits from other sources (be it recession, high interest rates on federal debt, social security costs, etc), and in general my own preferences are to raise more revenue from consumption taxes or pigovian taxes rather than income tax rate increase.

Posted by: justin84 | March 18, 2010 12:34 PM | Report abuse

By "international norms" for health-care costs, Ezra means but won't say that other countries won't allow their people to be looted by a for-profit health-care sector, and they bring it to heel either through single payer or very stringent regulation a la the Swiss and the Dutch. The comments here make clear an essential point - we can control costs either on the backs of the consumer (us) or we can do it by refusing to be looted by the private health-care market. I would choose the latter, but nothing the administration or Congress has done in the current bill indicates that they're too interested in that. Pity.

Posted by: redscott | March 18, 2010 12:38 PM | Report abuse

This post made me realize that what I presumed most people understood is in fact obscure to most people: that trends over time are the starting point, the elementary facts which matter.

I begin assuming that and think forward from there, so that the above post from Ezra is only reviewing the basics to me.

But now I'm realizing that probably a large portion of America simply doesn't know this reality, and it is the key thing to communicate.

Not the impossible trend illustrated in the graph (which is only a helpful illustration of an idea -- what cannot be sustained won't happen). Rather, the real danger is just the likely trend over the next 5-10 years.


Even health care taking up 20% of the economy *too soon* (a few years too soon) is very economically disruptive, due to the rate of change in job types versus the skill sets of the population, and the ability of businesses and families to pay versus their other financial commitments (mortgages, etc.).

Posted by: HalHorvath | March 18, 2010 1:27 PM | Report abuse

Visionbreaker et al: Olbermann himself did apparently agree to a great many tests and procedures for his father, though not everything that could possibly have been done. His father was evidently conscious and sentient most of the time and could participate in decisions. Plus, they did have advance directives. The EMT he spoke with was relating what happens in the absence of directives.

These are very difficult decisions, having been through it with both of my parents. And they depend on individual circumstances such as what the disease or condition is, whether the person is senile or participating, their age, the amount of pain involved, prognosis for recovery, what recovery would actually mean etc.

A large part of it is the difficulty many of us have in accepting death as the inevitable outcome of life, the guilt some people feel about unfinished business with their parents, and religious beliefs. Then add in the skewed system of incentives for providers. Voila, high health care costs at the end of life.

Posted by: Mimikatz | March 18, 2010 2:07 PM | Report abuse


actually its visionbrkr but that's ok, i've been called worse.

I remember a specific show of his. His father in excruciating pain (as Keith explained it) asked for him to let him die. I don't remember the exact words Keith used but it was basically that. From my understanding he has an advanced directive. He didn't grant him that wish. Sometimes its for our own selfish reasons as you say, sometimes its a hope for a miracle. We all don't know how we'd react when we're put under that pressure. I don't assume I'd act differently. I'd hope I would but who knows. It is something that needs to be brought back into the discussion but in this political climate, I doubt it will anytime soon, sadly.

Posted by: visionbrkr | March 18, 2010 3:29 PM | Report abuse

Indeed the projected growth in hc is the problem. But the problem is most likely the projection itself, not the growth. Things don't ever grow that quickly for very long. It will reach equilibrium soon enough. The lower frequency of new drug approvals is an indication of this slowing trend.

I'm glad this sort of budget projection has motivated some good legislation, but I don't think I beleive it for a second. The irony, is that no one asks whether the budget predictions are too pessimistic. Both parties are too invested in saying that the federal debt will be the end of us.

Posted by: zosima | March 18, 2010 10:20 PM | Report abuse

I think what this graph really says is that how you "project" the "growth rate" of future per person health care spending is the deciding factor on whether the budget is sustainable or not.

Unless of course the US government exits the health care business in which case the rate of growth of health costs is inconsquential to the budget :-)

Thanks much for sharing the graph.

Posted by: cautious | March 19, 2010 1:12 AM | Report abuse

The comments to this entry are closed.

RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company