Health Care, Deficits, Krugman and Scarborough

A big scrum has broken out on the subject of the deficit, with Paul Krugman’s appearance on “Morning Joe” setting off a pretty good back and forth on the issue, with Krugman taking a deficit position that Scarborough has chosen to attack as irresponsible. What did Krugman actually say? Krugman has been a vocal opponent of “austerity” policies, pointing to the fact that slashing government spending in times of recession leads to economic contraction and job loss, the last thing that this economy needs right now. He has refused to accept the idea that the “debt” and the “deficit” are immediate threats, rather pointing to the need for economic recovery before the debt issue is fully addressed. I believe that his view is that government spending will fill a hole created by the economic downturn, and that attempts to immediately reduce government spending (austerity) will create economic contraction. Krugman points to the European experience with austerity (Britain, Ireland) as an example of the failure of these policies. In light of the severe recession Krugman’s point is that austerity will create a “death spiral”, with austerity contracting the economy, driving up debt as a percentage of GDP, leading to further austerity, further contraction, and on and on we go.

The so called “deficit scold” network is led by the Simpson-Bowles Commission folks and the Pete Peterson Foundation, with Scarborough as a cheerleader. Their focus is on “entitlement reform”, as it is clear that under current economic conditions the numbers involved (Medicare and Medicaid) just do not work. As Scarborough is fond of saying you can make no appreciable progress on the long term fiscal imbalance without addressing the real drivers of the deficit and our debt: Medicare, Medicaid, Social Security, and Defense. The massive increase in health care costs in the United States have driven this fiscal problem, as both Medicare and Medicaid are sagging under the weight of health care inflation. Scarborough is a Republican who likes to tweek the President for “lack of leadership” on fiscal issues, and who has launched a public relations jihad against Krugman after Krugman said, on his show, that we should not worry about the debt and deficit until the country was on a solid trajectory on job and economic growth. Scarborough has obsessed on it, going back and forth with Krugman through the blogs each writes. Here is Scarborough’s opening salvo:

Mr. Krugman came on “Morning Joe” and declared that Washington needn’t worry about its long-term debt problem until the moment that programs like Medicare begin melting down.
“If we are worried about health care costs in the year 2025, why do we have to worry about it now?” asked The New York Times columnist. It is a question regarding our looming entitlement crisis that is every bit as ridiculous as a healthy 50-year-old man asking why he should bother buying life insurance.

Krugman, of course, has fired more than a few missiles of his own.

On both sides of the Atlantic, the austerians seem to be freaking out. And that has to be good news, an indication that they realize, at some level, that they’re losing the debate.

First up, the sad story of Joe Scarborough, whose response to my anti-austerian appearance on his show has been a bizarre campaign to convince the world that absolutely nobody of consequence shares my views. Why is this bizarre? Because while I could be wrong about macroeconomics (although I’m not), it’s just not true, provably not true, that I’m alone in arguing that the current and near-future deficit aren’t problems. (Among others, there’s this guy you may have heard of).

So in the latest twist, JoScar is citing my Princeton colleague Alan Blinder, who he claims is totally at odds with my position. Hmm. The article he’s citing (which is in the Atlantic, not the New Yorker)), bears the following headline:

How to Worry About the Deficit: (1) Don’t; (2) Wait a Few Years; (3) Then Worry About Healthcare Costs

Is there anything we can take out of all of this? Has one side achieved intellectual victory? Anybody being carried out on a stretcher? Despite some of the difficulties in cutting through the nonsense I think there is one point that seems to be a matter of consensus.

1) Everyone in this debate now appears to agree that “short term austerity” is the wrong answer for the American economy. Well maybe everyone but the House Republican caucus. Conservative Alan Blinder, cited by Scarborough above, had this to say in his Atlantic article.

RIGHT NOW: With the economy still so weak, the case for near-term fiscal contraction is weak as well. We shouldn’t kick away the fiscal crutch until the patient is ready to walk. If I am allowed to indulge in wishful thinking, a two-pronged policy that combines modest fiscal stimulus up front with serious deficit reduction thereafter would be even better.

Scarborough has collapsed in front of the Krugman offensive on austerity, and Scarborough’s citation of Blinder makes the Krugman case stronger, not weaker. That issue seems like settled law to me. What about the predictions of doom on borrowing ability and interest rates? The so called medium term? Blinder refutes the assertion, made repeatedly by deficit hawks, that the U.S. Government will not be able to borrow, or that interest rates may spike as a result of deficit spending.

THE NEXT DECADE: Strange as it may seem with trillion-dollar-plus deficits for four years running, the U.S. government still has no short-run borrowing problem. On the contrary, investors all over the world are still clambering to lend us money at negative real interest rates. In purchasing power terms, they are willing–nay, eager–to pay our government to borrow from them!

According to the CBO’s January 2012 projections, the federal deficit as a share of GDP will shrink from 9 percent of GDP in fiscal 2011 to roughly 5 percent of GDP in fiscal years 2015-2018, without any further policy actions. To be sure, 5 percent of GDP is still too high. But coming from the stunning 10 percent of GDP in 2009, it’s a long way down. A reasonable target for deficit reduction over the next decade might be 2 to 3 percent of GDP, starting perhaps in fiscal 2014.

So once again Krugman, and now Scarborough, appear to agree that the warnings of imminent financial collapse, or interest rate Armageddon, are not credible. (Krugman’s assertions that the “deficit scolds” warnings of collapse in two years or less five years ago made him more credible seemed to drive Scarborough crazy.)

So that leaves the long term, with Krugman saying that immediate plans to reduce the deficit by addressing entitlements is not necessary, while Scarborough and others insist on structural reforms NOW. (Even though those reforms generally would not take effect for at least ten years). I guess Krugman believes in the old adage “In the long run we are all dead”. Not as big a difference as Scarborough would have you believe, and one that could be bridged quickly if we lived in a textbook world. But we do not live in such a place. So let us quickly go over some things that Joe Scarborough always seems to forget.

1) If there is going to be some agreement on entitlement reform there must be agreement on revenues. And the revenue number will not be less than Simpson-Bowles, which is about $2.2 trillion over ten years. So far we are at about $600 billion in increased revenues. The Republicans like to say that you cannot tax your way out of this problem. They are right. But you cannot cut your way out either. Hit the Simpson-Bowles revenue number and you can have a discussion on entitlements. Until then the Republicans, and Scarborough, have a one sided argument that is going nowhere.

2) Why do you need revenues? Because as high as spending is as a percentage of GDP (by historical standards) tax revenue is also at a low point. You cannot run this economy with revenues at 15.5% of GDP. It is just not possible. A major reason for that….

3) Health Care inflation. Without health care cost inflation being brought under control we are all dead. (Well, maybe just insolvent). And although Speaker Boehner and Joe Scarborough have ridiculed President Obama’s contention, made to the Speaker, that we do not have a spending problem but rather a health care problem, it is absolutely true. From the Blinder column in the Atlantic:

Now on to health care costs. The next graph adds a fourth line the graph above. It shows primary government spending other than for health care as a percent of GDP. It is the lowest of the four lines in the diagram, tracking down from around 16 percent of GDP now to only about 11 percent of GDP by 2087.In plain English, the costs of everything on which the federal government spends money except health care and interest — and that includes Social Security, defense, you name it — are projected to fall over time as a share of GDP. The message is clear: America doesn’t have a generalized spending problem that requires severe cuts across the board. We have, instead, a massive problem of exploding health care costs.

The graph charts 4 items as a percentage of GDP. Primary spending, Total Spending, Primary Spending Less Health Care, and Revenues. The difference between primary and total spending is outlay for interest payments. The graph shows what Blinder refers to in the above quote, and what Krugman has been saying for some time. It is not a spending problem. It is a HEALTH CARE problem. Until we figure out how to bend that cost curve we are in serious trouble. And if we listen to the austerity now crowd we are in even bigger trouble. Click on the graph for a larger version.

Graph

Graph

http://www.msnbc.msn.com/id/32545640

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