Steve Rattner is upset that Congress isn’t voting to cut Social Security and Medicare, complaining about this fact in a NYT column this morning. Much of the problem seems to stem from Rattner’s misunderstanding of budget projections and his failure to pay attention to recent developments in health care spending.
At one point Rattner gives us the distressing news that a do nothing scenario will give us a debt to GDP ratio by 2035 of 99 percent (@ 19 percentage points less than the post World War II peak) then tells us:
“That may be too rosy a picture. The Congressional Budget Office assumes robust growth over the coming decade — not a single year of recession and three annual G.D.P. increases of about 4 percent beginning in 2015. (By comparison, the G.D.P. is likely to grow by just 1.7 percent this year.) Slower growth means a higher debt-to-G.D.P. ratio.”
Actually CBO constructs long-term projections that are supposed to average out the impact of recessions and the more rapid growth that usually follows them. This explains the three years of 4 percent GDP growth. The economy is currently 6 percentage points below its potential according to CBO’s estimates. These three years of rapid growth would allow it to make up this gap. The average growth rate projected for the next 22 years is 2.36 percent, which hardly seems especially fast given the economy’s current position.
The other part of the story is that Rattner apparently missed is the sharp slowdown in the growth of health care spending we’ve seen over the past five years. This has already led CBO to substantially lower its projection for health care spending in future decades. If CBO were to fully incorporate the recent slowdown in health care spending in its projections, then the primary (non-interest) budget would be nearly balanced for decades into the future.
Steve Rattner is upset that Congress isn’t voting to cut Social Security and Medicare, complaining about this fact in a NYT column this morning. Much of the problem seems to stem from Rattner’s misunderstanding of budget projections and his failure to pay attention to recent developments in health care spending.
At one point Rattner gives us the distressing news that a do nothing scenario will give us a debt to GDP ratio by 2035 of 99 percent (@ 19 percentage points less than the post World War II peak) then tells us:
“That may be too rosy a picture. The Congressional Budget Office assumes robust growth over the coming decade — not a single year of recession and three annual G.D.P. increases of about 4 percent beginning in 2015. (By comparison, the G.D.P. is likely to grow by just 1.7 percent this year.) Slower growth means a higher debt-to-G.D.P. ratio.”
Actually CBO constructs long-term projections that are supposed to average out the impact of recessions and the more rapid growth that usually follows them. This explains the three years of 4 percent GDP growth. The economy is currently 6 percentage points below its potential according to CBO’s estimates. These three years of rapid growth would allow it to make up this gap. The average growth rate projected for the next 22 years is 2.36 percent, which hardly seems especially fast given the economy’s current position.
The other part of the story is that Rattner apparently missed is the sharp slowdown in the growth of health care spending we’ve seen over the past five years. This has already led CBO to substantially lower its projection for health care spending in future decades. If CBO were to fully incorporate the recent slowdown in health care spending in its projections, then the primary (non-interest) budget would be nearly balanced for decades into the future.
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The answer seems to be no. Its piece on the budget deal negotiated by Senate Budget Committee Chair Patty Murray and House Budget Committee Chair Paul Ryan told readers:
“The deal, while modest in scope, amounts to a cease-fire in the budget wars that have debilitated Washington since 2011 and gives lawmakers breathing room to try to address the real drivers of federal spending — health care and entitlement programs like Medicare and Social Security — and to reshape the tax code.”
It would be equally valid to say that the budget deal gives lawmakers breathing room to plan an attack in Freedonia. Addressing the “real drivers of federal spending” is the NYT’s agenda, it is not in any obvious way the agenda of Congress. It is also not clear that this is accurate in any important way.
Social Security spending has risen by roughly one percentage point as a share of GDP since 2000. It is projected to rise by roughly the same amount over the next two decades due to the continued aging of the population. It is then projected to remain pretty much flat for the rest of the century. This does not suggest a problem in obvious need of fixing.
Medicare costs are projected to grow more rapidly due to the projected rise in per person health care spending in the private sector. This suggests a need to contain health care costs in the economy as a whole. In the last five years per person costs have grown only slightly more rapidly than per capita GDP. If this trend continues, then there is no need to have further measures containing Medicare costs even without any further increases in revenue or offsetting cuts elsewhere.
The piece also includes some mind reading, telling readers:
“The proposal quickly drew fire from conservatives who saw it as a retreat from earlier spending cuts and a betrayal by senior Republicans.”
A reporter would write this sentence:
“The proposal quickly drew fire from conservatives who claimed to see it as a retreat from earlier spending cuts and a betrayal by senior Republicans.”
The answer seems to be no. Its piece on the budget deal negotiated by Senate Budget Committee Chair Patty Murray and House Budget Committee Chair Paul Ryan told readers:
“The deal, while modest in scope, amounts to a cease-fire in the budget wars that have debilitated Washington since 2011 and gives lawmakers breathing room to try to address the real drivers of federal spending — health care and entitlement programs like Medicare and Social Security — and to reshape the tax code.”
It would be equally valid to say that the budget deal gives lawmakers breathing room to plan an attack in Freedonia. Addressing the “real drivers of federal spending” is the NYT’s agenda, it is not in any obvious way the agenda of Congress. It is also not clear that this is accurate in any important way.
Social Security spending has risen by roughly one percentage point as a share of GDP since 2000. It is projected to rise by roughly the same amount over the next two decades due to the continued aging of the population. It is then projected to remain pretty much flat for the rest of the century. This does not suggest a problem in obvious need of fixing.
Medicare costs are projected to grow more rapidly due to the projected rise in per person health care spending in the private sector. This suggests a need to contain health care costs in the economy as a whole. In the last five years per person costs have grown only slightly more rapidly than per capita GDP. If this trend continues, then there is no need to have further measures containing Medicare costs even without any further increases in revenue or offsetting cuts elsewhere.
The piece also includes some mind reading, telling readers:
“The proposal quickly drew fire from conservatives who saw it as a retreat from earlier spending cuts and a betrayal by senior Republicans.”
A reporter would write this sentence:
“The proposal quickly drew fire from conservatives who claimed to see it as a retreat from earlier spending cuts and a betrayal by senior Republicans.”
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People who follow economic data know that quarterly growth numbers are highly erratic. For example, the 3.6 percent growth rate reported for the third quarter in the United States was driven largely by inventory accumulations. As a result, most analysts expect growth to be close to 1.0 percent for the fourth quarter. It would be foolhardy to tout the 3.6 percent growth in the third quarter as evidence of a robust economy, while it would be equally wrongheaded to treat a weak number in the fourth quarter as evidence of a sagging economy.
Unfortunately the NYT seemed unaware of the volatility of quarterly data as it touted a strong third quarter growth number as evidence of the success of austerity in the UK. It contrasted this number to a weak growth figure in Japan, which it implied meant the failure of stimulus there.
Of course this claim is absurd on its face. Japan will almost certainly have far stronger growth over the calendar year than the UK, and even more so on a per capita basis. (Japan’s population is shrinking at a 0.1 percent annual rate, while the UK’s population is rising at a 0.6 percent annual rate. Therefore we should expect more rapid overall growth in the UK just to sustain the same rate of per capita growth.)
To take a slightly different measure, according to the OECD, Japan’s employment to population ratio is rose by 1.1 percentage point from the third quarter of 2012 to the third quarter of 2013. This would be equivalent to an increase in employment of 2.8 million in the United States. By contrast, the employment to population ratio in the UK increased by just 0.2 percentage points from the second quarter of 2012 to the second quarter of 2013 (the most recent data available).
The piece includes numerous other inaccuracies, at one point telling readers:
“With an even greater dependence on its financial sector than the United States — but neither the shale gas boom nor a reserve currency to help fuel a recovery.”
Actually the UK does have a reserve currency, as hundreds of billions of dollars’ worth of pounds are held as reserves by central banks around the world. It also is not clear that this helps the recovery. Insofar as the dollar or pound falls it helps to boost net exports, stimulating growth and generating jobs.
The piece also contains the bizarre statement:
“Those in the stimulus camp who liked to point to “a natural experiment” playing out between Britain and Japan, where stimulus measures introduced by Prime Minister Shinzo Abe produced a burst of economic activity earlier this year, have gone quiet. Abenomics, as Mr. Abe’s approach was soon dubbed, has not proved to be the panacea some had hoped.”
Since every economist knows that quarterly data is erratic it is questionable whether any have “gone quiet” over the recent economic data. It would have been helpful if the piece could have identified an economist whose opinion of the relative merits of austerity and stimulus was changed by the third quarter data.
People who follow economic data know that quarterly growth numbers are highly erratic. For example, the 3.6 percent growth rate reported for the third quarter in the United States was driven largely by inventory accumulations. As a result, most analysts expect growth to be close to 1.0 percent for the fourth quarter. It would be foolhardy to tout the 3.6 percent growth in the third quarter as evidence of a robust economy, while it would be equally wrongheaded to treat a weak number in the fourth quarter as evidence of a sagging economy.
Unfortunately the NYT seemed unaware of the volatility of quarterly data as it touted a strong third quarter growth number as evidence of the success of austerity in the UK. It contrasted this number to a weak growth figure in Japan, which it implied meant the failure of stimulus there.
Of course this claim is absurd on its face. Japan will almost certainly have far stronger growth over the calendar year than the UK, and even more so on a per capita basis. (Japan’s population is shrinking at a 0.1 percent annual rate, while the UK’s population is rising at a 0.6 percent annual rate. Therefore we should expect more rapid overall growth in the UK just to sustain the same rate of per capita growth.)
To take a slightly different measure, according to the OECD, Japan’s employment to population ratio is rose by 1.1 percentage point from the third quarter of 2012 to the third quarter of 2013. This would be equivalent to an increase in employment of 2.8 million in the United States. By contrast, the employment to population ratio in the UK increased by just 0.2 percentage points from the second quarter of 2012 to the second quarter of 2013 (the most recent data available).
The piece includes numerous other inaccuracies, at one point telling readers:
“With an even greater dependence on its financial sector than the United States — but neither the shale gas boom nor a reserve currency to help fuel a recovery.”
Actually the UK does have a reserve currency, as hundreds of billions of dollars’ worth of pounds are held as reserves by central banks around the world. It also is not clear that this helps the recovery. Insofar as the dollar or pound falls it helps to boost net exports, stimulating growth and generating jobs.
The piece also contains the bizarre statement:
“Those in the stimulus camp who liked to point to “a natural experiment” playing out between Britain and Japan, where stimulus measures introduced by Prime Minister Shinzo Abe produced a burst of economic activity earlier this year, have gone quiet. Abenomics, as Mr. Abe’s approach was soon dubbed, has not proved to be the panacea some had hoped.”
Since every economist knows that quarterly data is erratic it is questionable whether any have “gone quiet” over the recent economic data. It would have been helpful if the piece could have identified an economist whose opinion of the relative merits of austerity and stimulus was changed by the third quarter data.
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Washington Post columnist Charles Lane argues that President Obama’s newly proclaimed focus on inequality is misplaced, saying that it is not likely to be a popular agenda. He concludes by noting some polling results and then commenting:
“Create jobs, slash debt, then worry about equality. Isn’t that the Republican pitch?”
Actually this is not at all the Republican pitch. The Republican pitch is to reduce taxes for rich people and corporations. It also calls for reducing regulations that prevent corporations from taking property from or harming individuals. For example, they are opposed to requiring oil and gas companies to disclose the chemicals they use in fracking so that nearby residents would be able to hold companies accountable if these chemicals contaminated their land and water.
As a vast body of research shows, the best way to create jobs in the current economy is to have the government spend money in areas that create jobs, like teaching, health care, or improving infrastructure. While job creation would strengthen the labor market and reduce inequality by increasing wages for those at the middle and bottom of the distribution, the Republicans are completely opposed to this agenda. They have demanded cuts in spending that slow growth and reduce employment. Also, the Republicans never worry about equality.
Washington Post columnist Charles Lane argues that President Obama’s newly proclaimed focus on inequality is misplaced, saying that it is not likely to be a popular agenda. He concludes by noting some polling results and then commenting:
“Create jobs, slash debt, then worry about equality. Isn’t that the Republican pitch?”
Actually this is not at all the Republican pitch. The Republican pitch is to reduce taxes for rich people and corporations. It also calls for reducing regulations that prevent corporations from taking property from or harming individuals. For example, they are opposed to requiring oil and gas companies to disclose the chemicals they use in fracking so that nearby residents would be able to hold companies accountable if these chemicals contaminated their land and water.
As a vast body of research shows, the best way to create jobs in the current economy is to have the government spend money in areas that create jobs, like teaching, health care, or improving infrastructure. While job creation would strengthen the labor market and reduce inequality by increasing wages for those at the middle and bottom of the distribution, the Republicans are completely opposed to this agenda. They have demanded cuts in spending that slow growth and reduce employment. Also, the Republicans never worry about equality.
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David Brooks presented readers with an outline of the types of people who will exist in a future economy in which, by his assessment, 15 percent of the people will thrive as a result of being able to work with computers and the 85 percent will struggle. While his list includes synthesizers, humanizers, and motivators, it left out justifiers.
Justifiers are likely to be an important category of worker in high demand in an economy where 15 percent of the population thrive at the expense of the other 85 percent. They are likely to be especially important in a context where the wealth and prosperity of the 15 percent depends on government granted patents and copyright monopolies. Advocates of free markets and equality might advocate more efficient mechanisms for financing creativity and innovation.
David Brooks presented readers with an outline of the types of people who will exist in a future economy in which, by his assessment, 15 percent of the people will thrive as a result of being able to work with computers and the 85 percent will struggle. While his list includes synthesizers, humanizers, and motivators, it left out justifiers.
Justifiers are likely to be an important category of worker in high demand in an economy where 15 percent of the population thrive at the expense of the other 85 percent. They are likely to be especially important in a context where the wealth and prosperity of the 15 percent depends on government granted patents and copyright monopolies. Advocates of free markets and equality might advocate more efficient mechanisms for financing creativity and innovation.
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The NYT had an interesting piece on a dispute over continuing a clinical trial of a heart device that has been tied to a number of incidents of blood clots. While the device had originally been used in patients who likely risked death without it, the trial is designed to examine its effectiveness in patients with less severe heart disease. The incidents of blood clots raise the possibility that the risk exceeds the potential benefit.
At one point the article noted that the doctors working with the device maker continue to defend the safety of the device and intend to continue the clinical study. It then quotes a cardiologist at Duke, one of the authors of a study showing the higher incidence of blood clots, who notes that these doctors had spent years setting up the trial:
“They are more apt to look at the data that suggests there is less of a problem, …”
It would have been worth noting that in addition to the time they spent setting up the study, they also likely stand to make a substantial amount of money if the device is approved for use in a larger group of patients. This is a function of patent support for the research and development of medical devices.
It is likely that researchers will want to defend their research in any case, since they will be reluctant to accept that years might have been wasted. However the incentive to pursue a line of research even if new evidence suggests it is counterproductive will be much greater if there is potentially a large monetary reward. At least, this is what economic theory predicts.
The NYT had an interesting piece on a dispute over continuing a clinical trial of a heart device that has been tied to a number of incidents of blood clots. While the device had originally been used in patients who likely risked death without it, the trial is designed to examine its effectiveness in patients with less severe heart disease. The incidents of blood clots raise the possibility that the risk exceeds the potential benefit.
At one point the article noted that the doctors working with the device maker continue to defend the safety of the device and intend to continue the clinical study. It then quotes a cardiologist at Duke, one of the authors of a study showing the higher incidence of blood clots, who notes that these doctors had spent years setting up the trial:
“They are more apt to look at the data that suggests there is less of a problem, …”
It would have been worth noting that in addition to the time they spent setting up the study, they also likely stand to make a substantial amount of money if the device is approved for use in a larger group of patients. This is a function of patent support for the research and development of medical devices.
It is likely that researchers will want to defend their research in any case, since they will be reluctant to accept that years might have been wasted. However the incentive to pursue a line of research even if new evidence suggests it is counterproductive will be much greater if there is potentially a large monetary reward. At least, this is what economic theory predicts.
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The Washington Post had a useful piece on the Treasury Department’s adoption of a stronger than expected version of the Volcker Rule, which is likely to seriously limit the extent of proprietary trading at the major banks. At one point the piece tells readers;
“In anticipation of the Volcker rule, many large banks, including JPMorgan, have shuttered or spun off their proprietary trading desks, as well as their private-
equity arms and hedge funds. That could blunt the full force of the rule, analysts say.”
It’s not clear what this could mean, since the point of the Volcker Rule was to keep banks from engaging in proprietary trading. If they have spun off their trading desks then its purpose will have been accomplished. The goal is not to prevent trading, but to prevent banks from effectively speculating with government guaranteed deposits.
The Washington Post had a useful piece on the Treasury Department’s adoption of a stronger than expected version of the Volcker Rule, which is likely to seriously limit the extent of proprietary trading at the major banks. At one point the piece tells readers;
“In anticipation of the Volcker rule, many large banks, including JPMorgan, have shuttered or spun off their proprietary trading desks, as well as their private-
equity arms and hedge funds. That could blunt the full force of the rule, analysts say.”
It’s not clear what this could mean, since the point of the Volcker Rule was to keep banks from engaging in proprietary trading. If they have spun off their trading desks then its purpose will have been accomplished. The goal is not to prevent trading, but to prevent banks from effectively speculating with government guaranteed deposits.
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Ross Douthat raises an interesting issue in his column on Obamacare. Douthat suggests that Obamacare may not succeed elsewhere in the same way as it did in Massachusetts because people don’t feel as warmly inclined toward the government in other states.
There are several pieces of Douthat’s story that aren’t quite right. First, this is private insurance, not government insurance. It’s not clear how people think they would be making a strike against the government by not buying private insurance, but we can skip that one.
Douthat also follows the pack in buying the young invincible story. The key to the success of Obamacare is getting healthy people to sign up. It doesn’t matter what age they are. In fact, the program gets three times as much money out of every healthy senior as it does from a healthy twenty five-year-old. In fact, the gap is likely to be even larger since young people are more likely to get a subsidy since their income is on average lower.
But it is at least possible that we will see the adverse selection story that Douthat raises, although the outcome will not be quite what he envisions. Under Obamacare each state is effectively its own pool.
Clearly there are other states where people are likely to act like the people in Massachusetts and sign up for health insurance. But there could also be states, let’s call them Texas, where many healthy people may decide that as a matter of principle they will not sign up for Obamacare.
This would give us the classic death spiral. If fewer healthy people sign up for insurance then the cost of the insurance will rise. This will lead more relatively healthy people to opt not to sign up. That would further raise the cost of insurance, leading more people to drop insurance. The end game is that Obamacare in these states could end up as a shell. The costs could be so high that almost no one takes advantage of the exchanges and instead just pays the penalty.
This would create a striking gap between the states where Obamacare worked and the exchanges were running well and Texas, where a large share of the population would not have insurance. We have already seen a split along these lines with the refusal of Texas and other states controlled by Republicans to expand Medicaid with federal funds, as provided for under the ACA. However the collapse of the exchanges would affect a much larger and more politically influential segment of the population. This would directly affect the security of middle class workers.
It’s not clear that the people of Texas would be happy with the outcome of their individual decisions if the collapse of the exchanges really was the outcome. Tens of millions of workers in the non-Texas states would enjoy security in their health insurance. If they lost their jobs or had some other adverse set of events they would still be able to buy a reasonably priced insurance plan. That would not be the case in Texas.
That outcome would be unfortunate for the people of Texas, but it might lead to an interesting political dynamic.
Ross Douthat raises an interesting issue in his column on Obamacare. Douthat suggests that Obamacare may not succeed elsewhere in the same way as it did in Massachusetts because people don’t feel as warmly inclined toward the government in other states.
There are several pieces of Douthat’s story that aren’t quite right. First, this is private insurance, not government insurance. It’s not clear how people think they would be making a strike against the government by not buying private insurance, but we can skip that one.
Douthat also follows the pack in buying the young invincible story. The key to the success of Obamacare is getting healthy people to sign up. It doesn’t matter what age they are. In fact, the program gets three times as much money out of every healthy senior as it does from a healthy twenty five-year-old. In fact, the gap is likely to be even larger since young people are more likely to get a subsidy since their income is on average lower.
But it is at least possible that we will see the adverse selection story that Douthat raises, although the outcome will not be quite what he envisions. Under Obamacare each state is effectively its own pool.
Clearly there are other states where people are likely to act like the people in Massachusetts and sign up for health insurance. But there could also be states, let’s call them Texas, where many healthy people may decide that as a matter of principle they will not sign up for Obamacare.
This would give us the classic death spiral. If fewer healthy people sign up for insurance then the cost of the insurance will rise. This will lead more relatively healthy people to opt not to sign up. That would further raise the cost of insurance, leading more people to drop insurance. The end game is that Obamacare in these states could end up as a shell. The costs could be so high that almost no one takes advantage of the exchanges and instead just pays the penalty.
This would create a striking gap between the states where Obamacare worked and the exchanges were running well and Texas, where a large share of the population would not have insurance. We have already seen a split along these lines with the refusal of Texas and other states controlled by Republicans to expand Medicaid with federal funds, as provided for under the ACA. However the collapse of the exchanges would affect a much larger and more politically influential segment of the population. This would directly affect the security of middle class workers.
It’s not clear that the people of Texas would be happy with the outcome of their individual decisions if the collapse of the exchanges really was the outcome. Tens of millions of workers in the non-Texas states would enjoy security in their health insurance. If they lost their jobs or had some other adverse set of events they would still be able to buy a reasonably priced insurance plan. That would not be the case in Texas.
That outcome would be unfortunate for the people of Texas, but it might lead to an interesting political dynamic.
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NPR used the phrase “massive” stimulus in describing the Fed’s quantitative easing policy in its top of the hour news segment on Morning Edition. It is arguable whether the stimulus is “massive.” There is certainly a plausible argument that the stimulus is too small since unemployment remains high and inflation is running below the Fed’s 2.0 percent target. NPR could have saved time and increased accuracy by just referring to the program as “stimulus.”
NPR used the phrase “massive” stimulus in describing the Fed’s quantitative easing policy in its top of the hour news segment on Morning Edition. It is arguable whether the stimulus is “massive.” There is certainly a plausible argument that the stimulus is too small since unemployment remains high and inflation is running below the Fed’s 2.0 percent target. NPR could have saved time and increased accuracy by just referring to the program as “stimulus.”
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