Sunday, December 9, 2012

Federal Spending in the U.S.—Healthcare in Crisis? Townsley on the Zakaria Interview of James Baker (12-9-12)

For his show today, Fareed Zakaria interviewed James Baker, former Chief of Staff to Reagan (and the final year of GHW Bush), Secretary of Treasury (Reagan), and Secretary of State (GHW Bush). Zakaria asked him about several foreign and domestic issues. While it is unsurprising that I disagreed with most of his domestic advice, I was surprised to be in agreement with all of his foreign policy advice.

Our first area of domestic policy disagreement was about taxation and spending claims. Regarding the debt and deficits, he was adamant that the problem is not undertaxation, but that we are overspending, parroting the standard Republican dogma. However, I have never understood this position, since the data seems to tell the opposite story. First, as I have shown elsewhere our tax revenues are at the lowest rates since WWII (currently around 15%, compared to 20.6% under GHW Bush; previous low around 16.5% under Eisenhower) and while top marginal rates were as high as the 90s during quite robust GDP growth (post WWII), we are now fighting over a range of the low to mid 30s. Second, spending as a percent of GDP in 2011 was just 1% above Reagan’s spending in 1982-1983: Obama’s 23.9% to Reagan’s 22.9%. Looking at data going back to 1966, you can see in Graph 1, the average spending to GDP ratio for these time periods, which clearly do not evidence a precipitous increase.

Third, it is true that certain accounts have been moving steadily upward. Graph 2 shows the top 4 budgets as a % of GDP, along with federal consumption/investment. The latter, as I have described elsewhere, is what can be described as the “size of government”—i.e., it is the amount of money that is paid to federal employees, for buildings, roads, NASA, etc. This is discretionary spending that can be enlarged or contracted each year, and since the end of the Reagan years, this spending has declined. As Graph 2 shows, since 1975, federal consumption/spending has gone from a high of 9.8% of GDP, to a low of 5.8% in Clinton’s final year, and as of 2011 was 8.2%. Similarly, “welfare” programs (housing security, food security, unemployment insurance) have remained relatively constant, increasing from 3.9% in 1975 to 4.8% in 2011, with a sudden recent increase associated with the recession.

In contrast, it is the long-term social insurance programs, Medicare, Medicaid, and Social Security that have increased, collectively rising from 3.8% in 1975 to 8.8% in 2011. But it is specifically healthcare costs that have risen the most, with Social Security rising from 2.3% to 3.1% of GDP, while the combined healthcare programs rose from 1.6% to 5.7% of GDP. Given that the solvency of Social Security is not in question by economists, the CBO, nor the Social Security Trustees, and the easiest way to ensure long-term solvency is to remove the cap for Social Security tax (currently at $110k, beyond which you are not taxed), healthcare is the only federal program whose rising costs since 1975 seem to be cause for concern. Baker specifically refers to the dramatic increase in spending, the same phenomenon about which Republicans and Libertarians have been, en masse, frantically referring. But I have not seen data to support this panic.

Healthcare spending is a concern. Zakaria asked Baker how he would solve this problem, and—I am not making this up—Baker answered confidently, “FIX IT!” Zakaria gave him the opportunity to elaborate, but Baker’s response was the standard response from those who claim to want to “slim government,” which is that we must “cut entitlements.” What exactly this means, or what it would look like, Baker left unaddressed.

I do not believe the healthcare spending situation is at a crisis point, nor do I believe the solution involves “cutting entitlements.” Most economists do not believe this either, if what you mean by "cuttting entitlements," is to eliminate or dramatically reduce health care services to the elderly and impoverished families. For example, the Republican talking point of “cut entitlements” presumes that the problem of healthcare costs is that people are consuming too much of these goods on the federal dime. However, medical economists argue that we are simply spending far too much for our healthcare, and that there is too much costs within the for-profit insurance system. The basis of comparison is other industrialized economies, where, not only do they have superior healthcare outcomes, but they do it far more cheaply. Graph 3 shows, that of the top 20 OECD countries, we spend 150% more than the next nearest country for health care per capita, and double the OECD average. If our health outcomes were twice as good as the OECD average, this might seem acceptable. However, many of these countries have a greater lifespan than we do in the U.S., and dramatically lower infant mortality rates. Japan, who currently has the greatest lifespan in the world, spends 2nd to the last of these top 20 countries per capita for healthcare, almost a third of U.S. expenditure. Of the advanced economies, the U.S. is one of only three countries without universal healthcare (along with Turkey and Mexico). So not only do we outspend all other advanced economies in healthcare, and have poorer outcomes for the expense, the other countries are able to cover all of their citizens, while maintaining democratic societies with equivalent or stronger economic growth than the U.S. Thus, the idea that the way to solve the U.S. debt/deficit problems are to “cut entitlements” (i.e., cut government funded health care services to the elderly and poor children) is not based on a reasonable assessment of the data, and thus, Baker’s response to Zakaria’s question is faulty.

Another answer that Baker gave to Zakaria as a solution to our budget problems, with which I disagree, is his belief that a better solution will come from “behind the door” closed meetings. However, I struggle with what he seems to be affirming in this statement. My concern is that he is arguing for less transparency in government, at a time when most people recognize that more transparency is vital for a democratic society. My concern is also, that while there is a vibrant movement that wants to limit government spending (Tea Party), there are a far larger number of voters who expressed their wishes about raising taxes on the highest earners, simplifying the tax code, getting us out of military engagement overseas, and expanding healthcare. National polls find similar results. Is Baker’s hope that if our legislators can shut out the voice of the people, they will vote his way, instead of their way?

Surprisingly, despite these objections to Baker’s domestic policy suggestions, we have three points of agreement on foreign policy. The first, is his affirmation, similar to national polls referenced above, that we need to get out of our overseas military engagements. He believes they lower our standing globally, since they make other countries angry with us and put us in international situations we do not need to be in, not to mention funding issues involved in our bloated military budget. Second, Baker and I agree on the Israel—Palestine conflict--as he states it, “Israel cannot continue to be … a democratic … state if it stays in occupation of all of those Arab lands." He affirms that they need to stop settlements in Palestinian territory and start the engines of peace. He similarly affirms that the U.S. has a large role to play, and that we need to be far more hands-on with the issue, attempting to generate peace through working with both Israel and Palestine. Finally, he believes that Republicans need to revamp their priorities in the coming years if they are to remain a vibrant party, specifically, his belief that they need to focus on economic issues and drop their current focus on regressive social issues. Indeed, Republicans would undoubtedly have done far better in the Senate, and likely Romney's electoral standing, had several Republican Senate candidates not been so outspoken on women's reproductive rights, and how their (mistaken) beliefs would translate into their social engineering policies.