Niall Ferguson is really upset. He heard about the conspiracy among progressive bloggers to pay Newsweek to print his error filled piece trashing President Obama. He fires back with this piece in the Daily Beast. It's just as much fun as the last one.
To start with, Ferguson is intent on digging himself deeper into a hole on his original claims:
"The president pledged that health-care reform would not add a cent to the deficit. But the CBO and the Joint Committee on Taxation now estimate that the insurance-coverage provisions of the ACA will have a net cost of close to $1.2 trillion over the 2012–22 period."
Ordinary people would presumably read the second sentence to be a refutation of the first. Obama said his plan would not add to the deficit, but two authoritative sources say the insurance provisions would cost $1.2 trillion. That's pretty damning, except that Krugman and others have pointed out that the CBO estimates show that the ACA will reduce the deficit, not increase it.
But Ferguson fires back:
"The point (still not grasped by Andrew Sullivan, who thinks I was just talking about the gross costs) is that the net effect of ACA on the deficit is not positive if you look at the likely costs and the likely revenues from the tax hikes that will finance it. To get to the Congressional Budget Office’s conclusion that, over 10 years, the ACA will reduce the deficit, you need to believe that the act will half the rate of growth of Medicare costs. I am not inclined to be optimistic about that."
Okay, now we have:
"net effect of ACA on the deficit is not positive if you look at the likely costs and the likely revenues from the tax hikes that will finance it."
But, this is not the authoritative estimates from CBO and the Joint Committee on Taxation promised in the original article. This is the Niall Ferguson assessment of the net cost of the ACA over the decade. This means that President Obama's health care plan is a net money saver by the assessment of CBO and the Office and Management and Budget (I haven't seen the JTC's assessment), but apparently not by Niall Ferguson's. I suppose they should be worried about that.
Ferguson then tells us:
"incidentally, while we are on the subject of the CBO’s projections, since March 2010 it has already increased its estimate of the gross costs over 10 years from $944 billion to $1,856 billion, its estimate of total revenue from $631 billion to $1,221 billion, and its estimate of total Medicare cuts from $454 billion to $743 billion. This really is a fast-moving target."
Maybe that has something to do with the 10 years that CBO was looking at in 2010 were 2011 to 2020, whereas the 10 years it is looking at now are 2013 to 2022. By the way, if we are keeping score, the cost is now down to $1,168 billion as a result of the Supreme Court ruling.
Then we get this indictment:
"But the clincher is the CBO’s latest long-run budget forecast, according to which total federal government expenditure on health care is projected to rise from 4.9 percent of GDP this year to between 13.8 and 15.1 percent in 75 years’ time."
That sounds really bad, but if we go back to 2009, we see that CBO was projecting that health care spending would be 17.8 percent of GDP in 2083. That amounts to a saving due to the ACA of between 2.7 and 4.0 percent of GDP. That would be between $405 and $600 billion a year in today's economy. And the ACA would extend insurance coverage to another 20 million people. It seems a bit rich to be attacking a president who has had much more success by these projections in reducing costs than any of his predecessors.
But Ferguson is right, these costs would be hard to bear. However since he gets to use the Ferguson projections in lieu of CBO projections, I get to use the Baker projections. The growth in health care costs in the CBO projections imply that per person health care costs in the United States will rise from more than twice the average in other wealthy countries (e.g. Germany, Canada, U.K. etc) to three or four times.
That doesn't seem plausible to me. If the gap in costs is really that large then people will find ways to take advantage of lower cost care in other countries, after all, we are talking about savings that would run into the tens of thousands of dollar a year per person. (The CBO projections imply that in the 2080s, per person health care costs for seniors would be over $40,000 a year, if adjusted to the size of today's economy.) If public debate were not dominated by protectionists we would already be allowing Medicare beneficiaries to buy into more efficient health care systems in other countries and splitting the savings.
Ferguson raises some other issues (yes, we needed more stimulus, as some of us said back in January of 2009), but then gets back to his favorite topic, the deficit. He tells us:
"The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues—what economist Larry Kotlikoff calls the true "fiscal gap"—-is $222 trillion."
Ferguson then adds that Kotlikoff is "the world’s leading authority on generational accounting and long-term fiscal stability."
Wow, really? CBO didn't think so when it did its analysis of Kotlikoff's generational accounting back in 1995 and concluded that it wasn't good enough for government work. (My conclusion as well.) It's also not clear how clever Kotlikoff was back in 2007 when he was telling people that they were saving too much for retirement.
Okay, but enough of the cheap fun, the real point here is that Kotlikoff's measure is not telling us much. Kotlikoff's horror story would vanish if we fixed our health care system. But even the more standard measure of the debt is not telling us much of anything.
I will have a paper making this point in more detail in a couple of months, but let's do a little thought experiment. The current interest rate on 30-year Treasury bonds is 2.75 percent. It has averaged well over 6 percent in the quarter century before the crash.
Suppose that the Treasury issued $4 trillion in 30-year bonds at the current interest rate. Suppose that the economy recovers in 2 or 3 years and interest rates return to 6.0 percent. In this case, the bonds would sell in the market for less than half of their face value. In other words, we would be able to buy up $4 trillion in Treasury debt for less than $2 trillion.
Suppose we buy up this debt at its lower price. Have we made our children and grandchildren better off by eliminating $2 trillion in debt and reducing our debt to GDP ratio by more than 10 percentage points? Will we have escaped the slow growth curse of the 90 percent debt to GDP ratio that Ferguson warns us about in this piece?
Of course this is all silliness. Large deficits when an economy is near full employment can crowd out private investment and slow growth. Large deficits when we have massive amount of excess capacity like now carry virtually no cost and if they put people back to work they will be making our children better off. Leave Ferguson and his friends to their superstitions. The rest of us have an economy to mend.