The Median Hyper-Partisan

So, we still have a Republican House (a bit more so), a Democratic Senate (a bit more so), and Obama as President (a bit more so?). Things are as they have been, except that the fiscal cliff (more detail here) is closer and both sides' tendency to refuse to negotiate has been reinforced. (update: by this I meant simply that each can say "I won the election; my voters want me to go on with what I was doing.")

I'm wondering about the incentives that have created this situation, and there's an interesting theory expressed at Barack Obama's re-election: A country divided | The Economist. Basically the columnist here is saying that there are two forces involved.


1. The Median Voter Theorem -- if parties A and B want to catch the median voters, they should move towards the center. The incentives are strong, and that should bring the parties together -- and in real policy terms, it does: "Realistic arguments over policy take place on relatively narrow terrain: they are arguments over a top marginal tax rate of 35% or 39.6%, over a health-insurance system with guaranteed coverage for pre-existing conditions but with or without a mandate, and so forth." Actual radical solutions are simply not part of the discussion, even if academically preferred (e.g., forget the income tax altogether, it's a bad idea: tax consumption instead.)

The Republicans and Democrats are, in practical policy terms, much much closer to each other than either would ever consider being to someone like me. They've come together towards the median voter. Yes, but we also see

2. Media promotion of exciting stories. "...both mass-media analysts and private social-media contributors are rewarded for sharply divisive characterisations." I would generalize this: the effective politician is an entertainer, and he and his team (or she and hers) are also rewarded for generating exciting stories. The most basic story to be told is about Good v. Evil, and even while you're adjusting policies to capture the median voter, you want to be generating stories about Our Friends and Our Enemies; these work just as well on high IQs as low. The divisions here have something to do with policy, but not a great deal... I recently saw a Youtube video of someone going around asking Obama supporters for their comments on "Romney" policies such as the drone strikes, and naturally getting "That's EEEVIL" as the usual response -- but these were actually Obama policies. Interestingly, some of the respondents said they'd have to rethink their Obama support -- but I predict it won't make a lot of difference. And I'm sure it would work just as well in reverse, on Romney supporters.


Of course this means that my own obviously sensible policies have no chance of being enacted. What worries me more than that, though, is that I think the emotional manipulation by both sets of manipulators is increasingly successful. I see intelligent good people on both sides who do not want to know why intelligent good people would be on the other side. That's scary.


As the Economist says,

...Over the next four years, legislative battles are going to continue to be savage and hard-fought. Neither conservatives nor liberals are going to change their minds en masse about fundamental issues of political philosophy. The top priority is for Americans to figure out a way to keep these divisions from dividing the country into two hostile armed camps that are incapable of talking to each other.

Or then again, maybe not.

Two Hundred Trillion Dollars

There are some silly songs on Youtube about the $46,000 debt we're giving each new child at birth; the songs are supposed to make you feel guilty about what we're doing to our children, and I think they're supposed to energize you against the debt-ceiling rise and for the balanced budget amendment. Well, the debt ceiling is stupid, and the balanced budget amendment is a really bad idea, and $46,000 is a ludicrous figure; the correct figure, the figure that the average kid needs to pay (or pay interest on, or pass on with accrued interest to the next generation,) is probably well over half a million. Nobody can know exactly; it depends on future growth of expenses and revenues and population, but $46,000 is a very small fraction of the total.

In April 2010, after the health-care bill's passage, I wrote a "One Hundred Trillion Dollars" context post in which I quoted the Dallas Fed:

Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent. ... all we would have to do to fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent....defense and national security, education, the environment ... All of them [forever]

Today I noticed on Yahoo a more up-to-date and more complete and therefore more scary view of the same concept, from BusinessWeek, in Why the Debt Crisis Is Even Worse Than You Think:

A more revealing calculation is the CBO’s measurement of what’s called the fiscal gap. That figure is conceptually cleaner than the national debt—and consequently more alarming. Boston University’s Kotlikoff has extended the agency’s analysis from 2085 out to the infinite horizon, which he says is the only method that’s invulnerable to the frame-of-reference problem. It’s an approach used by actuaries to make sure that a pension system doesn’t contain an instability that will manifest itself just past the last year studied. Years far in the future carry very little weight, converging toward zero, because they are discounted by the time value of money. Even so, Kotlikoff concluded that the fiscal gap—i.e., the net present value of all future expenses minus all future revenue—amounts to $211 trillion.

How does that work? Well, let's think about the Smith family and the Jones family, each expecting the same future expenses spread out over time. Joe Jones intends to pay as he goes; he hasn't borrowed anything. Sam Smith has borrowed enough money from a bank to fund an investment account which will pay exactly the same expenses. In fact, aside from the issue of bank profit, he had to borrow exactly the net present value of those future expenses. (He has a triple-A rating, of course. For now.) You can think of various ways that they're in different situations, but the Smith and Jones families are basically comparable: the payments on Smith's loan will not over time be appreciably different from Jones' direct expenses. So we can think of both of them as having the same financial future: if one is in trouble, they both are. And right now, the US has the same financial future as if it had made no unfunded promises but had borrowed a grand total of $211,000,000,000,000.00. So far.

Is that exact? No, of course not. Things might not be quite that bad, they could be even worse: as the article says, the calculation is quite sensitive to assumptions about future events and policy. But it's accurate enough to say that the "debt" is not what we should worry about; we should worry about the "fiscal gap".

Of course, if you worry about the debt, then it makes sense to talk about the deficit: $850 billion dollars last year. What if you're worried about the fiscal gap? Does the deficit become irrelevant? Yes, really; as Kotlikoff says:

The gap was $205 trillion last year, measured in today’s dollars. That’s an increase of $6 trillion. ... Hence, the real deficit we should be worrying about is more than six times larger than the $850 billion official deficit capturing all the attention.

In other words, Congress and the president’s administration could agree to run a balanced budget, making this year’s official deficit zero, and the nation’s true indebtedness would still rise by $5.15 trillion!... the main reason is that we are one year closer to having to pay 78 million baby boomers roughly $40,000, on average, per year in Social Security, Medicare and Medicaid benefits. Because the fiscal gap is a discounted present value, one year makes a big difference.

If you think back to the Smith and Jones family, and imagine the fiscal gap as an implicit debt, then the $5 trillion is mainly the result of our failure to pay even the interest on the $206 trillion we owed last year -- we do have a really good interest rate as long as we keep the AAA rating, but it's not zero.

So, should we balance the budget anyway, even if it's inadequate to do so? No -- not in years with high unemployment. I'd agree with Calculated Risk: Debt Ceiling Update

A politician can say "We should have a balanced budget". It sounds good, but why aren't they challenged about operating vs. capital budgets? And about business cycle spending (obviously revenue falls during a recession - and spending increases)?

What they really want is a balanced operating budget over the business cycle. You can't put that in the Constitution. It requires effective government and constant vigilance.

But even capital vs. operating budget doesn't quite do it for me: I want the fiscal gap, over the business cycle, to remain a limited multiple of GDP. Fifteen times GDP? Okay, fifteen times GDP. (It would be nice to shrink it.) But don't let it keep growing (as a multiple of GDP) from one business-cycle peak to the next.

And with all that, should my taxes be raised? Yes, emphatically so -- my taxes should be raised as part of a plan to deal with the fiscal gap. I can and should pay more taxes than most people; that part's understood. I'm not in Kerry's league for lifetime income, not even in Obama's, but I can pay more taxes than I do -- it won't even cut my consumption until taxes get quite a lot higher. What I don't think most raise-taxes people understand is that even though a fairly substantial tax hike won't be a "hardship", won't seriously cut my consumption, it will cut my reinvestment. It has to. So it will reduce the money available to future generations of taxers; in fact a dollar of tax revenue increase now is somewhat more than a dollar of tax revenue decrease later, because you'll have spent the money before it grew. So it's crucial, when you take my money, to take it as part of a plan to deal with the fiscal gap--otherwise the gap grows and you've taken some of the resources we'll need to deal with it. (I tried to go over this in the aforelinked One Hundred Trillion Dollars post.) In any case, if you actually want to fix things, focus on consumption, not income. (I'll still pay more than average, I promise.)

And is it hopeless? Not at all. We still see, e.g. Foxconn to replace workers with 1 million robots in 3 years. We still see Sarcos Exoskeleton Bringing Iron Man Suit Closer To Reality and the beautiful Watch Festo's SmartBird Robot Soar Over TED Conference. We still see Loss of memory due to aging may be reversible and, for young and old, How Khan Academy Is Changing the Rules of Education. We may even see Could 100 Kilometer high towers usher in the next space age?

The SpaceShaft concept isn't as ambitious as the space elevator but it is much more feasible. For 130 million Euros we could design and construct a 100 kilometer tall SpaceShaft within a decade. Once we have SpaceShafts up and running, the frontier of space will finally be open to humanity.

Or then again.... maybe not.

update: Fixed silly typo which had billions instead of trillions.

It's all about healthcare. Well, and signaling.

This afternoon I was sitting in the third row, right behind the woman who placed the winning bid -- $13,000 -- on the auction of Harry Potter's bow tie. Well, of J. Pierpont Finch's bow tie, Finch being the lead character of How to Succeed in Business Without Really Trying; Finch is played by Daniel Radcliffe, a talented young actor/singer/dancer (well, a bit weaker as a dancer, I thought, but I'm no judge) who will probably be plagued for the rest of his life by people who can't help but think of him as Harry Potter. And he and his co-star were trying to raise money for a Good Cause, namely healthcare, after the performance. (Okay, a specific healthcare cause, but I'm still fussing about healthcare in general.) So....

So I would call the winning bid rather impressive; I think most people would. Radcliffe commented that we were "well over the record", some time before the auction closed---I presume he does this with a fresh bow tie for each performance. But I couldn't help but be reminded of the cost of my own appendectomy, not quite a year ago: it was in fact a little over the bow tie's price. Consider what that audience pays for healthcare each year...the auction was a Good Thing to Do, an Exercise in Nobility, a demonstration of the Brotherhood of Man (that being the last song&dance) but as a contribution to healthcare it was a teaspoonful in a lake.

Yes, I understand that's not the point. It's not really about healthcare, even healthcare is not really about healthcare. Robin Hanson put it rather well, some time ago, in his argument that it's about Showing That You Care:

I can explain these puzzles moderately well by assuming that humans evolved deep medical habits long ago in an environment where people gained higher status by having more allies, honestly cared about those who remained allies, were unsure ... These ancient habits would induce modern humans to treat medical care as a way to show that you care. Medical care provided by our allies would reassure us of their concern, and allies would want you and other allies to see that they had pay enough to distinguish themselves from posers who didn’t care as much as they.

That makes sense to me as the beginning of a model, and it certainly isn't a criticism of the woman who paid so much for the bow tie. She evidently does care, and presumably cares that it's evident that she cares, and that's a good thing.

Nonetheless, if you want to use healthcare provision to show you care, I think it would be a good idea to spend some time looking for actual ways to provide actual healthcare; a few more teaspoons of water in the lake won't do it. So I'd like to go back over my proposal of a bit more than a year ago. I'd organize it a bit differently now, but I don't seem to have moved all that far.

If I were (heaven forfend) In Charge, I would crowd-source as much as possible of the decision-making by pushing it into a market, with participants being given as much data for decision-making as possible, and being simultaneously milked for as much data as possible. I want incentives for innovation, to reduce the death-rate for billions yet unborn; I also want incentives for good performance now, not for the sort of regulatory capture our current system maximizes. Specifically I would:

1. Allow unlicensed health care, wherever it's clearly labeled as such; it won't get public support but people can choose to spend their money on it. The argument against this is apparently that people will make bad choices. Yeah, some will, probably including me and you. So? I've never understood the way some people believe that they (or those they select) can make good choices for others; in fact I'm moderately cynical about licensure requirements as they are now structured, whether for medics or morticians or cosmetologists.
2. Require transparent pricing, uniform no-bargaining pricing, from all providers of licensed health care. (The services producing my appendectomy really don't do this.)
3. Require that "licensing" be independent of geography; if the best/cheapest supplier of a particular treatment is two states over or on another continent, that's fine. As I've said before, I believe that telepresence medicine can enable the specialization and trade that has made markets work in other contexts since before Adam Smith wrote about it, so I expect this as the usual case, not an exception.
4. Take away the employer-based tax exemption; health care shouldn't be an employment issue.
5. Add a universal tax-funded "insurance" policy (insulation, actually): if your expenditures for "proven procedures" from licensed health care providers exceed the overall 16% (of GDP) average, then the taxpayers contribute some. Maybe if your cost is 30% of your income, then the taxpayers kick in (30-16)/2=7%, half of the overage, and the maximum you can pay is 50% of your income whether that's $0/year or $10M/year. Is that too generous? Not enough? I dunno. The point is to combine protection from catastrophe (but not from serious pain) with making sure that market prices are set by people or groups who are actually bargaining in that market, i.e. the better-off people for whom procedure X will not be covered. I want to do that combination with some simple, less-than-perfect-but-better-than-nothing rule with which I can trust a government. (Democrats and Republicans trust government on different things; just figure you want a better-than-nothing rule with which you'd trust a politician of the party you despise.)
6. If you want "unproven procedures" and you can pay for them, that's fine too; the licensed health care providers should have a strong motive to come up with new stuff and document/publish that it works. The FDA should not be able to keep you from paying for these likely-to-fail treatments, but it should keep you from charging it to the rest of us. If procedure X has no accepted studies supporting it, then it's up to you to pay for it.
7. Whatever additional insurance/insulation you want to buy for proven or unproven procedures is just fine, and can be bought across state lines. It's your problem. You want to save your money in a special bank account? Feel free.
8. Any care that has been paid or partly paid by public funds goes into an anonymized public database, so that we learn more about which treatments have what effects on which conditions. Organizations promoting not-yet-approved treatments will be encouraged to contribute data.

And that's really it, for me. I'm even less confident of this than I was when I wrote the first version, but I still don't see anything else I like as well. I think that the market I'm describing would probably evolve rather quickly into a market in which people choose and buy packaged health plans from "insurance" agents, and web sites build up crowd-sourced ratings of those health plans; there would be quite a bit of overlap with the better parts of what we have now. I hope. And I care, and I suppose I'd like to signal that I care.

Or then again, maybe not.

update:I never actually mentioned that this post was prompted by thinking about Mark Thoma's Economist's View: Discussion Question: How Can We Reduce the Growth of Health Care Costs?

there is far too much discussion of cutting services, and not enough about how to control costs without affecting services (e.g., using the government's purchasing power to reduce the amount the government pays for drugs, reducing the cost of insurance companies fighting over who pays bills, etc.)

You see, I doubt the premise: if you use government power as I believe Thoma wants, you are increasing the incentives for regulatory capture, crony capitalism, rent-seeking... you are putting yourself on a path where you have signaled your concern but healthcare is not what you're rewarding. Of course government power needs to be used -- to collect the money for treatments which research results say are crucial and which markets say are expensive. And government power needs to be used to maintain a context for innovation (rather than squelch it, as I believe our recent trends in "intellectual property" law tend to do.) But if bargaining-on-prices-with-the-government is the multi-billion$ activity you focus on, then that's what companies will have to invest in. That's a bad bad bad bad thing. I commented here.

Well, it's Easter morning. Maybe we're all saved?

Or then again, maybe not.

Upstate NY Demographics and School Consolidation

This is a doom-and-gloom post. Well, not really. But partly. It's not obvious that school consolidation would actually contribute to the solution, but there really is a problem. Let's look at it.

The image here, which is as it says from Cornell's Program on Applied Demographics, shows the Hamilton Central School district in the recent past and probable near-term future. Fifteen years ago we had 879 students -- we're down by more than 300, i.e. if the line kept going down we'd have a negative number of students in thirty years or so. Of course we won't do that, but we may reach 400 even sooner than the 2017 suggested by the (pessimistic) blue line on the graph. School consolidation is an obvious thing to think about, wouldn't you say?

What's actually going on here? Well, of course a lot of young people move out of upstate NY looking for jobs, a lot of people move out of NY altogether looking for jobs (and lower taxes, and following businesses which are following the people and looking for lower taxes too) and in any case my generation of Baby Boomers are aging fast -- and expensively. Here are two charts on Madison County demographics from the same Cornell group, at County Projections.

Just pick Madison as the county, and then consider 1990 and 2035.

As you can see, back in 1990 we had a bulge in high school (just before leaving to go find a job or college) and in 2035 they think we still will, but it's thinning out, no longer dominating the oldsters who use up the Medicare and pensions that our juniors will be trying to pay for. As our state office of mental health puts it,

In 2011, the first of the post-war “baby boom” generation (those born between 1946 and 1964) will reach the traditionally defined “old” age of 65 years. This “elder boom” will result in a doubling of the number of older adults from 35 million in 2005 to 70 million by 2030. In New York State, the number will increase over 50% from 2.4 million to 3.7 million.

So, fewer and fewer students, and the money is needed elsewhere. We cannot afford to go on spending $20K per student per year, and as time goes on we will get less able to afford it. It's not a comfortable picture. It doesn't have to be that way, of course: there's a whole lot that the federal government does to make things worse, that doesn't have to happen. We might end up looking at American history to see what kind of population influx we have handled before, and dramatically increasing the immigration rate. That would cause problems, but they'd be different problems; the projections would change. And the "elder boom" doesn't have to be that bad, if we don't retire -- you weren't going to retire, were you? Actually, maybe we can retire. On current projections we can't afford the Medicare that we've been promising each other (well, our kids won't be able to afford it on our behalf) but if we got rid of a bunch of anti-innovation laws and regulations, I think we'd do just fine. Moore's Law is applying to robotics and 3d printing; we should be able to afford much more than we ever did before -- unless innovation is blocked, as it so often is. I'm happy to blather on about that as I have before on this blog, but I don't see much that can be done about it locally, or even at the state level.

And Cuomo may be trying hard to spin his budget cuts, but he has to make some big ones -- the state is losing the ability to pay for what it used to pay for. Sure, some of that is due to the Great Recession and still-horrendously-high unemployment which keeps government outlays high and income low, some of that will return if and as the overall economy recovers (please note Japan's Lost Decade, still going strong after 20 years, if you think it has to recover) but some of it is just the way that New York never had a plan to fulfill the promises we've made to each other.

So, think about it. What would you cut? And don't say "well, I wouldn't cut X, that's no answer" even if X=education; look at New York state and local spending 2011 and decide: what would you cut?

Update: I should have put a link to the state budget data, at least to the (PDF)Executive Budget Briefing Book saying, on page 13 of 101,

New York public schools spend more per student than any other state – fully 71 percent above the national average – yet New York ranks 40th in graduation rates and 34th in the nation in the percentage of adults who have a high school diploma or the equivalent.

So what would you cut? Would education really be altogether off your list?

Consolidation Links; Cuomo Unfair to Upstate? --Mar 19

I've gotten behind on this, but the links (collected as always on delicious.com) don't link to each other so I will try to catch up; Superintendent Bowers blogged on further Albany budget cuts and Ken Bausch commented in News From Albany [comment by Ken]

While building aid and UPK are exempted,all other aids are reduced by @23% this year. Thus we are not actually receiving transportation aid at 76 cents on the dollar, rather the effective rate is only 59 cents on the dollar. Thus a dollar spent on new vehicles last year costs the district 41 cents, rather than the 24 cents we assumed during the vote on the acquisition of a new bus and fuel efficient vehicle last year.

Radio Free Hamilton reported HCS Budget Cuts Include Positions

The cuts include the equivalent of five and a half full time positions. These include:

    * 1 full time administrative position;
    * 1 full time secondary guidance counselor;
    * 1 full time occupational therapist (these services will be purchased...);
    * 1 full time elementary school teaching position;
    * 1/2 choral music teaching position;
    * 1/2 science teaching position;
    * 1/2 custodial position.

Other cuts totalling $94,000 include:...

Of course it's all over the state; earlier this month, a Rochester-area district about a dozen times our size reported Proposed Greece school budget would eliminate 89 full-time staff positions

Greece, N.Y. — At a Greece school board meeting Tuesday night, interim superintendent John O'Rourke proposed a school budget that would slash 89 full-time staff positions from the Greece school district, reduce music education, and merge sports programs....The proposed $195 million budget would increase the tax rate 1.68 percent, bringing it to $22.92 per $1,000 assessed value. The budget calls for a reduction of elementary classroom time by 30 minutes a day, an increase in class sizes, the elimination of 4th grade music, reductions of instrumental and vocal music, and cuts to elementary art and library. The plan would also consolidate sports programs

The state-wide cuts do seem to have their main impact on rural schools, simply because the aid has been disproportionately directed to them, as argued in the Rochester area Glover: Proposed state cuts would be 'catastrophic' to rural schools:

Understanding that the state is in financial crisis and that everyone must make sacrifices, the superintendent says the proposed cuts in state aid are not fair spread out among suburban and rural districts. Small rural schools stand to lose the most. “We should all share in an equitable way,” Glover said. “Everybody has to tighten their belts, but this takes opportunities away from kids in rural schools.” Data taken from the Statewide School Finance Consortium website shows... Comparatively by county... “The poor schools are getting poorer,” as a result of the governor’s proposed budget cuts.

And smaller districts are being pushed towards consolidation, as in the Ithaca-area Trumansburg, South Seneca schools explore sharing resources:

Trumansburg Central School District officials are considering merger and resource sharing with the neighboring South Seneca Central School District. Spurred by Gov. Andrew Cuomo's public push for consolidation of smaller school districts in New York...

It's really quite a push, with some rather strong statements in which the New York governor hits school districts, defends education cut | Reuters

Claiming local school districts are playing "political games," New York's governor on Thursday defended his $1.5 billion cut to education spending. Governor Andrew Cuomo's proposed cut in state aid to schools -- the largest in history -- is aimed at closing a $10 billion budget gap for the next fiscal year. Cuomo told reporters on Thursday that his cuts average 2.7 percent per school district, and could be offset by rooting out inefficiencies, using reserve funds and lowering the salaries of superintendents.

It does seem that the governor is trying to understate the pain:Most school districts don't have deep pockets:

Andrew Cuomo continues his fiery rhetoric about school districts, claiming they have enough reserves and federal money in their coffers to weather state education cuts. Just Thursday he said districts shouldn't have to lay off teachers because of the aid cuts. But a report by the state Comptroller's Office this week shows that 100 of the state's 700 districts don't have the reserves and one-time federal "Education Jobs Fund" aid to offset the state reductions. Batavia is one of those districts.

The governor's not just making speeches. Capitol Confidential » Save NY now airs on school money

The pro-Cuomo Committee to Save New York is airing its third advertisement, targeting education waste. It quote a statistic that has made school officials bristle: New York is first in education spending but 34th in performance. That 34th ranking refers to the percentage of adults over 25 who have a high school diploma, and educators say it’s not a good measure given New York’s status as a magnet for immigrants. They point to other indicators, like the number of kids taking Advance Placement exams, which show New York doing better. It’s a clever ad. Someone is cutting up an education dollar while ticking off the stats, before Gov. Andrew Cuomo appears as the announcer says, “The governor’s plan target’s bureaucratic waste, and protects our students and teachers. Tell your lawmaker to support the governor’s plan.”

Upstate N.Y. schools anguish over aid cuts | The Ithaca Journal | theithacajournal.com

Among school districts facing the largest cuts per pupil, 97 percent are in upstate communities while 75 percent of those facing the smallest cuts are in downstate suburban communities, according to the Alliance for a Quality Education, an Albany-based union-backed advocacy group.

The cuts are necessary, because the state has run out of money. Why has the state run out of money? Well, quite a few reasons...here's one, as reported in the NYT two weeks back: State Workers and N.Y.’s Fiscal Crisis - NYTimes.com

At a time when public school students are being forced into ever more crowded classrooms, and poor families will lose state medical benefits, New York State is paying 10 times more for state employees’ pensions than it did just a decade ago. That huge increase is largely because of Albany’s outsized generosity to the state’s powerful employees’ unions in the early years of the last decade, made worse when the recession pushed down pension fund earnings, forcing the state to make up the difference. Although taxpayers are on the hook for the recession’s costs, most state employees pay only 3 percent of their salaries to their pensions, half the level of most state employees elsewhere. Their health insurance payments are about half those in the private sector...

So that's part of it. And what to do about it? I have no idea. Or rather, I have lots of ideas but of two kinds: trivial on the one hand, and politically impossible on the other. I dunno.

Mostly-Irrelevant Update: the NYT has an interesting proposal for partially fixing the long-term pension/budget problem which would have made the last couple of years more equitably disastrous, and would make the future better able to fund education: share the pain.

It is that simple: Just scrap the current indexing of pensions to the Consumer Price Index and replace it with a link to the state’s gross domestic product. We can’t accurately fund traditional pension plans until we have G.D.P.-linked bonds, or “trills,” which I described in a recent column. But it is time to start the transition, so that pensions share risks across generations.

That would be a good thing. It wouldn't fix our impending mainly-health-care financial disaster, but it would be a good thing.

Magic Dragons, Magic Ponies: Thoughts on Health Care

Pre-Obama: It seemed to me that GW Bush had a Magic Dragon approach to funding the stuff that he, as a rightwards big-government guy, wanted to do. Go ahead, borrow the money -- the Magic Dragon will pay the bill when it comes due. No details needed. So it's fine to cut taxes, it's fine to add a huge Medicare (Part D) entitlement, it's very fine to have a war. The Dragon will pay; just bring him "strings and sealing wax and other fancy stuff" and there's really no problem. Well, I didn't approve (I did and do approve of the war, but not the way he handled -- and funded -- it), but nobody asked me nohow. The Magic Dragon approach is not completely utterly 100% insane, of course: the dragon is growth, and if growth is sufficient then those debts are affordable. Even borrowing (at low interest) to enable a tax cut (which does stimulate growth) can be sort of sane, just as borrowing to invest in the stock market can be sane. I too had a credit line long ago, and closing it (and paying off my mortgage, tax-subsidized by renters, but why?) was less of a solid financial decision than a question of Puritan ancestors whispering at night. But it's risky because the Dragon might not come. In any case borrowing to finance growth in current consumption is not sane, and we've been doing a lot of that.

Early Obama: I was not enthusiastic about Barack Obama, to put it mildly. I could not vote for the guy whose preferred SCOTUS justices were in the majority on Kelo (and the minority on Heller), but I did approve of his economic team and I did think that they represented sanity and I did think that he, as a Great Communicator of Reaganesque stature, might get their sanity to reign. I now think I was wrong; I trusted them and him too much.

Summary-Now: The health care bill we passed last night is not a Magic Dragon bill; it's "paid for"; it's "deficit-neutral" or even "deficit-improving." The CBO says so, and assuming their assumptions I believe their results. Do I assume their assumptions? Not really, and even the assumptions that work for me are sleight-of-hand assumptions, shifting individual costs to where they are not visible to CBO scoring rather than actually reducing cost. Not a Magic Dragon bill, no. It's a Many Magic Ponies bill, instead. I think we're worse off than we were yesterday:

• The US is slightly less financially stable (slightly more liable to a double-dip recession and to prolonged growth reduction), because we have taken specific resources that we needed to pay for the entitlements coming due, and we have allocated these for a new entitlement. It's as if you let your household budget get wildly out of control for years, figuring that you'll find specific money to pay your debts Someday Later. Then you want to give some money to your local school, and you decide you'll fund that by giving up the habit of eating out every night. That's great, but you just reduced your options for paying off the boat and the jetski and the credit cards. Your problems are worse.
• I think that our age-adjusted mortality rates as of, say, 2020, will probably be higher than they would have been without the bill, because part of the bill is being paid with money that I believe would have fueled innovation. I don't think the mortality rates will be as high as they are now -- there will still, I hope and expect, be innovations and even increases in the rates of innovation -- but I think the trend just got less good than it was. (I wish I could make a concrete falsifiable prediction, and be reassured when it turns out wrong, but I can't think of one.)
• And as an extra added bonus, we are very slightly less free than we were.

So anyway, here are some of the things I hope to find that I'm wrong about.

(Some of) The Ponies: Let's start with the "doc fix". The idea is that Congress has been promising for years to cut what doctors are paid by Medicare, so now we say we really really mean it and we'll cut by 21% and then cut a little further each year as time goes on. The money saved because we really really mean it this time is Magic Pony money, we can spend it on whatever we like. And we know that doctors won't increasingly turn away patients even though they already have been:

Dr. Edward Kornel, a neurosurgeon based in White Plains, N.Y., stopped seeing Medicare patients two years ago. Two colleagues in his group practice have joined him in dropping Medicare patients over the past six months.... The American Association of Neurological Surgeons, to which Kornel belongs,...found that 65% of its 3,400 members said they are referring their Medicare patients to other doctors. About 60% said they were reducing the number of Medicare patients in their practice.

This has been going on for a while; in summer 2002 we had NUMBER OF PHYSICIANS TURNING AWAY NEW MEDICARE PATIENTS JUMPS 28 PERCENT. Still we know that the problem will not increase, we know that the reduced payment system will work, because this is a Magic Pony. An assumption, which should not be questioned. Has Walgreens already decided to follow some other drugstores and stop participating in (Washington State) Medicaid because reimbursements are already too low? Never mind, there are still participant drugstores. So far. Hmm...my feeling is that this particular Magic Pony has very low credibility: either Congress will again refuse to reduce the payments, or we will get a substantial increase in Medicare refusals. Neither prong looks good.

Are there more Magic Ponies? Of course. There's a Magic Pony list by Douglas Holtz-Eakin and a vituperative partial rebuttal by Brad DeLong; I believe part of the partial rebuttal, but as DeLong says most of the gimmicks are minor, and that

What does deserve attention is:

[T]the legislation proposes to trim $463 billion from Medicare spending and use it to finance insurance subsidies. But Medicare is already bleeding red ink, and the health care bill has no reforms that would enable the program to operate more cheaply in the future. Instead, Congress is likely to continue to regularly override scheduled cuts in payments to Medicare doctors and other providers...

As somebody-or-other said, this is budget nihilism: if we assume that congress will reverse all actions it takes to reduce the deficit and yet require that congress only pass bills that reduce the deficit nevertheless, we are asking that congress pass nothing at all. But if that is his argument, he should make it--and back it up.

But DeLong is generalizing in a way that Holtz-Eakin is not: Holtz-Eakin is saying that Congress has a specific credibility problem generated by repeated specific behavior, and that he sees no reason to expect Lucy to stop pulling the football away as she's done seven times before. DeLong presumably either believes that Lucy will stop this specific repeated behavior (for some reason not stated), or that this specific bill should be passed even in the expectation that the Magic Pony won't show up. It is not clear to me which he believes. My own concern is that the outcome looks bad to me, either way.

There's the initial-decade trick, of balancing six years' expenses against ten years' income. Hmm. We accept that taxes on "Cadillac" insurance plans are too unpopular to pass now, but we promise to do it later, in 2018 after the current administration is definitely out of office. We really mean it, too. Hmm. And we are going to apply Social Security taxes to upper incomes, which will then be at least partially paid back because the people who've paid them are then eligible for higher benefits, but the full amount will have been included on a Magic Pony. And spent. (Holtz-Eakin seems to assume that this is 100% fake, DeLong points out that it's only partially fake. Bystanders like me wonder -- but doesn't the repayment depend on how long these contributors live? If they live long enough, with benefits growing faster than inflation, isn't it more than 100% fake? Well, with a Magic Pony perhaps it doesn't matter. And DeLong is right that this isn't one of the big ones.

Some of the sleight-of-hoof comes by sliding the bills over to the states, as Medicaid sharing (after 2016). Hmmm...Arizona just cut 310,000 people off Medicaid, and More than half the states are reducing Medicaid services and payments to health care providers this year as the recession propelled enrollments to record levels and sapped money from treasuries. Sure, things ought to be better by 2016, but then again a lot of state budgets from NY to California with quite a few in between are having increasing budget problems, e.g. with their own pension funds. But this Magic Pony will increase their deficits, not the federal deficit, so it's not CBO-scored, and if states have to raise their taxes then it will not be a federal problem, and if the federal government winds up bailing out states that will be a completely separate transaction. And of course we slide costs to private industry: Caterpillar: Health care bill would cost it $100M. Caterpillar (like all those other companies) is in the business of using money to pay employees and suppliers and stockholders, making money grow. Whatever prediction you would have made yesterday about how much money is available to pay employees and suppliers and them what reinvests -- you should make it a teensy bit smaller, today. (Except that this is not a surprise.)

Am I arguing that the government should stay out of healthcare? Absotively posilutely not. Our government is good at raising money, and should traditionally step in in case of disasters whether regional or individual, and I would support a quite expensive plan like the one I proposed here. Especially if we shifted to growth-oriented taxation, mainly a consumption tax (whether VAT or just let everyone take income into a list of accounts and investments such that it doesn't get taxed until it leaves). To this I would add Pigovian taxes, employed cautiously, and progressive estate/gift taxes on, say, the top 1% of wealth and up, making it flatly impossible to inherit (or receive as gift) your way into the top 0.01% of wealth. I'm not exactly a libertarian when it comes to that sort of thing, but there's an envelope on the kitchen counter with a small check for Radley Balko because I really feel like we need more libertarian thinking around here. I'm not at the point of contributing to the Tea Party; the one Tea Party organizer I've talked with is a nice guy and very sincere but I am skeptical of his economic understanding, even compared with mine.

And freedom? I did mention at the beginning that I think that we're "very slightly less free than we were." Why? Well, this morning I did 50 pushups (pulse 117) and five minutes later managed only 36 (pulse 111) and five minutes later only 25 (pulse still 111; rest pulse is 58). Definitely not an athlete, just a reasonably healthy aging geek who has lost two pounds (183.8 to 181.6) in the last six weeks, which projects forward to, umm, weight zero in ten years? About that. And of course you shouldn't care, just as I shouldn't care if you do or don't exercise or eat your vegetables or smoke (as long as it's not upwind) or drink (as long as you don't drive drunk while my 13-year-old is crossing the street). And so on. We shouldn't have to care. But as I was saying recently, our biggest "health care" problems seem to include issues of obesity and of smoking history. Smoking's getting better (less) in this country, and congratulations to all you ex-smokers! Obesity's getting worse: I do sympathize. But if I'm paying the resulting health care bills...hmmm. Bloomberg-style nannyism becomes an issue of national solvency. Put down that doughnut, sir, and step away with your hands up. Exaggeration? Sure...but the issue is very real, and Bloomberg actually exists. Your right to make your own choices is already limited when others pay the cost, and that has just gotten very slightly worse. You cannot even choose to depend on alternative medicine anymore, unless you can pay your mandated payments for politically approved care and pay for whatever alternative you actually prefer. Liberty is slightly less. The rewards for those who decide what is politically approved are slightly greater. The FDA is slightly more of a political football than it was. Regulatory capture increases, crony capitalism strengthens.

Personally, I think it's a Bad Thing. But then again, maybe not. And this is one time that I really hope I'm really wrong.

[footnote: this post is an extended rumination around a walk-around-the-golf-course-between-our-back-yards with Sasha, who would of course much rather hear that I'd spent the time on code. Oh, well.]

update 3/23: I should have noted the CBO "direct spending and revenue" estimates at (CBO) March 20, 2010 Preliminary estimate of the direct spending and revenues effects estimate for proposed reconciliation legislation combined with H.R. 3590 as...; note that after it gets going, we seem to be headed towards $200 billion per year in addition to the money that isn't actually collected and spent by the Federal government, which is naturally not scored by the CBO...ulp. Whatever. Anyway, I would concur with most of Megan McArdle's remarks at 8 Predictions for Health Care:

The people wondering why I was so upset should contemplate that first, I think you people just screwed up both our health care system, and our fiscal system (even further), and that if I'm right, that's not really funny.... So now, onto predictions!

And I'd also point to her follow-up post, More on Health Care Predictions. But mainly, I would currently expect that

• the net number of lives saved as we transition from current trends, while plausibly not zero, will not rise above statistical noise (and might be zero)
• the number of lives lost long-run, mainly due to a decrease in the rate of increase of innovation but also because of misaligned incentives causing misdirected resources, will be very substantial
• curve-bending won't work as described.
• Many people will be happier, with lowered stress
• Many people will be less happy, with fewer choices -- and less money, and longer waits, and so on.

But I still have Hope for Change of the mainly technological kind; I just think we bent the curve the wrong way.

and more...So many good things said; I liked Zakaria's remarks that

There's more in here about cost controls than in any previous expansion of health care since the creation of Medicare. But objectively you'd have to say there isn't a lot. What there is takes one of two forms. ... the theory that Congress then would have the political courage to do what it now doesn't have political courage to do, which is an interesting theory. The second is ...the the kind of rationing board that I was describing -- nobody will call it such because it will be politically unpopular -- but in fact that's what it will do. . But if you then read some of the language instituting the commission, it says oh, it won't deny services to anyone, basically language to the effect it won't in any way curtail any kind of services or ration care. But of course, if you're not rationing care, how would you bring costs down?

And Sumner, my favorite commenter on at least monetary policy,weighs in on a Krugman commentary on the Holtz-Eakin item referenced above:

To summarize, all 7 of DHE assertions are correct. Krugman tries to change the subject by looking at different issues, like whether the front-loaded revenue is, by itself, enough to turn a deficit into a surplus. It’s not, but DHE never claimed it was. Then Krugman switches the subject from the 10 year to the 20 year forecast, and relies on incredibly rose-tinted assumptions. And after all this, he doesn’t lay a glove on DHE.

Well, maybe it won't do too much harm. Maybe. It does improve labor mobility. Not as much as my sort of plan, I think, but it is an improvement.