Can the market trust gradual deficit reduction?
There's a critique of the Affordable Care Act that argues that it doesn't save money. This critique is wrong. It doesn't save money if the bill is changed and its cost controls are repealed. But as written, our best estimate is that it saves money -- and it's as likely to save more than projected as it is to save less.
There's another critique, however, that is more persuasive: It saves money slowly. That frustrates me, too. But if you want to go faster, you need to figure out a way around the roadblocks that Jon Cohn describes:
Uwe Reinhardt, the Princeton economist, always reminds people that every dollar of wasted spending in health care is also a dollar of somebody's income. Take it away and that person is going to be unhappy. And while not every health care interest group has the credibility of the medical profession, everyone has money to finance advertising, organizing, and contributions -- not to mention well-connected lobbyists who know how to deliver messages in Washington.
This doesn't make cost control hopeless. It just makes cost control really, really slow. In most cases, you have to settle for reducing future earnings -- that is, allowing incomes for these groups to grow more slowly than they otherwise would. And that's precisely what the Affordable Care Act does.
This is also true for things like entitlements like Social Security and pricey tax-based entitlements like the mortgage-interest deduction. But a world in which most of your savings have to be phased in slowly is a world in which Congress has to be credible when it tells the public and the bond market that future congresses won't simply overturn its decisions.
Congress's record actually is pretty good on this front. The Social Security changes recommended in the early 1980s are being phased in on schedule. The vast majority of the budget cuts made in the '90s were implemented with little fanfare. But there's been an effort in the past few years to use the sad case of Medicare's doctor payments -- where a policy that people expected would mean tiny cuts proved flawed and required giant cuts that would've disrupted Medicare -- to undermine confidence that Congress can uphold any cost containment, and of course the current conservative fad for repealing the cost controls in the health-care law further suggests that the mere fact that legislation passed doesn't mean the bonds market can relax.
I've said it before and it's still true: If Republicans were really worried about the market's confidence in our finances, they'd have strengthened the cost controls in the Affordable Care Act and, whatever else they wanted to do to the bill, loudly embraced things like the excise tax and the Independent Payment Advisory Board. As it is, they've steadily tried to persuade the market to ignore the cost controls we've passed and assume instead that Congress won't follow through when it promises to pare back the tax breaks for employer-provided health care or allow a commission to actually get Medicare's spending under control.
That's good politics, but it comes at the cost of telling the bond market that it can't trust us even when we do pass cost controls. And that might mean that, down the road, the bond market demands deficit reduction happens quickly, rather than gradually, and that will be much more painful.
| October 26, 2010; 11:38 AM ET
Categories: Budget, Health Reform
Save & Share: Previous: Handicapping the deficit under divided government
Next: Half of all doctors using electronic records, most of the rest considering it
Posted by: bdballard | October 26, 2010 12:08 PM | Report abuse
Posted by: J_Bean | October 26, 2010 12:38 PM | Report abuse
Posted by: staticvars | October 26, 2010 12:41 PM | Report abuse
Posted by: visionbrkr | October 26, 2010 12:52 PM | Report abuse
Posted by: rmgregory | October 26, 2010 12:52 PM | Report abuse
Posted by: amy130 | October 26, 2010 2:10 PM | Report abuse
Posted by: paul314 | October 26, 2010 2:19 PM | Report abuse
Posted by: donopj2 | October 26, 2010 3:03 PM | Report abuse
Posted by: visionbrkr | October 26, 2010 4:17 PM | Report abuse