Economics

How Naïve Can Democrats Get?

Beholding David H. Howard’s rendering of the crazy-quilt of financial sources that have been tapped by the designers of the Affordable Care Act of 2010 (hereafter ACA ’10) to finance the new entitlements they put in place – a little nuisance tax here, a little nuisance cut in other federal spending there – reminds me once more of the sincere, indeed touching, naiveté with which Democrats tend to go about enacting new entitlements.

It is a totally counterproductive and inelegant approach. To be sure, none of the added taxes or spending cuts in the bill seriously disrupt anyone; but they do spread a little pain all around. Therefore, it seems almost deliberately designed to maximize opposition to it from many quarters.

It also leads to acute embarrassments, such as having to postpone by a year (and perhaps more years) the unseemly penalty imposed on employers with 50 or more employees each working 40 your or more etc etc, even at the appearance of having broken the law – or so we are told.

When will the Democrats ever learn?

And from whom might they learn?

From the Republicans, of course.

Dream back to the good old days – 2003 – when the Bush Administration and the Republican Congress pushed through, with deft parliamentary maneuvering and some arms twisting, H.R. 1 (2003), the Medicare Prescription Drug, Improvement, and Modernization Act – hereafter the MMA ’03.


This act established what was said to be the then largest new entitlements put on the books since the passage of Medicare and Medicaid in 1965, promising the elderly highly federally subsidized prescription drug benefits from 2006 on to kingdom come.

And how was that expensive new entitlement financed?

Not by annoying added taxes on anyone. Not by annoying cuts in any other federal program – not even on parts of the Medicare program so often decried as “out of control.”

No, the MMA ‘03 was 100 percent debt-financed. The cost of this magnanimous largesse was simply added to the deficit, for our children and theirs to finance with taxes, unless we somehow will manage to melt away that debt through inflation. According to Table III.D.3 of the 2013 Medicare Trustee’s report, the MMA ’03 $850 billion of financing for this entitlement during 2013-22 will come from General Revenues, that is, will be loaded onto the U.S. public debt during those years.

In the meantime, the buyers of the U.S. Treasury bonds represented by that debt – China and Japan prominently among them – hopefully will be kind enough to advance the cash to pay for the drugs. To pay back the debt in future years, our children and theirs may well have to cede ownership of hitherto U.S. assets that should have been part of their inheritance to the children and theirs in Japan and China. Perhaps our children and theirs will draw comfort from the fact that they are paying thus for grandpa’s and grandma’s prescription drugs which their parents – we current American adults — refused to pay for.

Now it is true that former Comptroller General of the United States David Walker, in which capacity he ran the United States Accountability Office (GAO), has said that “the prescription drug bill was probably the most fiscally irresponsible piece of legislation since the 1960s.” That may be so. On the other hand, look at the political elegance of that legislation.

Had the Democrats copied from the Republicans’ playbook on entitlements legislation and just deficit-financed the ACA ‘10, there would not have had to be a 2.3 medical device tax. There would not have been the added taxes on the already overburdened high income Americans. There would not have had to be the troublesome Cadillac tax on insurers. There would not have had to be the penalty on employers with 50 or more employees working at least 40 hours a week, etc. etc.

There would not have had to be those nasty cuts on Medicare Advantage plans, bring their payments down to be on par with what it Medicare beneficiaries in Medicare Advantage would have cost taxpayers, had they stayed in traditional Medicare. There would not have been any need to reduce the growth trajectory of Medicare spending on hospitals and on sundry other providers serving Medicare patients, and so on. It would all have remained business as usual as we, the people, like it.

Like the MMA ’03, the now much maligned ACA ’10 then would have been a giant Xmas tree bestowing many blessings on many (adult) American and asking no sacrifice from anyone (adult) American. Trying to finance it all without burdening future deficits, as the designers of the ACA ’10 have tried to do, is, like, really dumb!

Incidentally, for some home entertainment, I recommend that you examine the roll call for the MMA 03. You will find it here for the Senate and here for the House.

You will be amazed who all voted for that elegant new entitlement, given what they pronounce today on deficits and entitlements spending.

In quiet and boring rural New Jersey, I do find that sort of thing entertaining.

Uwe Reinhardt is recognized as one of the nation’s leading authorities on health care economics and the James Madison Professor of Political Economy at Princeton University. He is a regular contributor to The New York Times Economix Blog.

Editor’s Note: Last updated at 10/14/2013, 6:34pm ET.

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41 replies »

  1. I have tried this all my life but it never worked. My doctor tells me it’s hormonal or stuff like that. If you look at my picture, you can see why.

  2. This is a appropriate blog for everyone who is wishes to discover out about this subject. You recognize an excellent deal its practically challenging to argue with you (not that I just would want…HaHa). You certainly put a brand new spin on a topic thats been discussed for years. Wonderful stuff, just wonderful!

  3. It isn’t right to spend money you don’t have if you are a Democrat. It also isn’t right to spend money you don’t have if you are a Republican.

    Ok, now that this is settled, all arguments regarding which side spent money they didn’t have under whatever president for whatever old/new entitlement program(s) are moot. They shouldn’t have done it.

  4. Yes, they “got stuff done.” However, was it good stuff? Or, was it pork-barrel politics, backroom deals, vote-buying stuff full of “Bridges to Nowhere” and “Big Digs” and entitlement programs that were destined to go broke.

    Would a more partisan Congress have let Tip get to waste all those billions on the Big Dig?

  5. The irony here is that on the Medicaid side, it can be cheaper to buy name brands. States get big rebates on the name brands and can actually lose money on some generics. it makes no sense, but welcome to the world of health care finance.

  6. Deficits only matter and entitlements are only bad when Democrats are in power.

    Concern for paying our debtors only matters when we’re not threatening to shut down the government and go into default.

    And having exchanges up and working (hearings!!!) only matters when we’ve given up on shutting them down.

    The fact is, very little of this about policy and all about points.

  7. I understand that the author was just bored and throwing out some “it’s all George Bush’s fault” red meat for the partisans and didn’t mean for any of the mélange of facts in this article to be taken seriously but…

    1. it’s worth remembering that the Medicare trustees and/or actuaries and/or Medpac and/or CBO has been overstating the projected cost of Part D since before the five-hour-long five-minute vote referenced above… by a 100% or more

    2. any intellectually honest analysis (again, I realize that the author did not intend this article to be one) of Part D would look at it as the three pronged program that it really is
    — the prong that simply replaced Medicaid in most states giving low income seniors the free drugs they always received (or drugs with nominal co-pays); that’s about 40% of the actual Part D spend and goes to 20% of the people on Medicare; that is not new government money despite the fact that wonks count it that way when asking that these people be put back on Medicaid
    — the prong that gives about 50% of people on Medicare drug insurance they could not previously buy. This is also about 40% of the overall Part D spend and is the part that needs to be more explicitly financed (but in that financial analysis count the apparent savings to Parts A and B resulting from people taking their meds)
    — the prong that covers about 1% of the people on Medicare but takes up 20% of the spend; catastrophic coverage; I don’t know how that was previously financed (charity, costs passed to everyone on drugs, or a loop back to the first prong as such people eventually went on Medicaid)

    So I understand that this is this author’s little contribution to his party’s decade-long effort to defund and repeal the MMA. What I can’t figure out is why they are doing this to their base… the low income people who have already been harmed by the cuts to C and those that will be harmed by being sent back to Medicaid for drugs.

  8. “The cost of this magnanimous largesse was simply added to the deficit, for our children and theirs to finance with taxes”

    The truth seems to be that both the inelegant plan of the Democrats and the more elegant plan of the Republicans end up taking money out of our children and grandchildren’s pockets and possibly wrecking the economy in the meanwhile.

    Thus the only conclusion I can gather is that both programs stink, or one wants to steal from future generations. Do I have that right?

    So which side do you wish to take?

  9. Uwe, you are correct and that is one big reason for our federalist system and a reason for the federal government to stay out of these types of affairs.

  10. Not despair, but realism. I actually worked in government at the beginning of my career. Wanted to work in the White House (OMB).
    Like you, I have well meaning friends in the middle of this morass.

    I’m not giving up. I will continue looking for people I have confidence in and will vote for them (and contribute to their campaigns) when I find them.

    Like a lot of other people, I am looking for leadership, and eventually, we’ll find it. It’s the parties, particularly the Congressional parties, where the rot is. . . .

  11. I think there is plenty of hypocrisy among American voters as well. We want generous entitlement benefits but we expect someone else to pay for them. We reward politicians who pander and demagogue while we penalize those who thruthfully tell us what we don’t want to hear. We get the government we deserve and the enemy is us.

  12. Maybe the reason why the folks get away with governing the way they do is that people just throw up their hands in despair over those “bums” and then roll over, rather than calling them on their hypocrisy.

    I would consider it useful, for example, if at a press confence someone asked Obama how he reconciles his opposition to raising the debt limit during the Bush years with his present posture on that issue.

    People did call Hillary Clinton on the dissonance bewteen her enthusiastic early support of the war in Iraq and her later posture on it.

    Similarly, I think it is quite alright to call people like Boehner or Ryan who now posture to argue that their oppositi on drives up deficits when they voted for the arguably most fiscally irresponsible new entitlement just a few years ago.

    You may wish to roll over in depair. That is your lrivilege. I won’t. Snd that is mine.

    Best,

    Uwe

  13. Neither of these parties is about “Ideas” for how to govern our country, so consistency with their “ideas” of a decade or more ago has no practical effect on their behavior or agendas going forward. The history lessons are interesting but not particularly useful.

    The core business of both parties, Congressional and Presidential, is raising money for the next election and arousing their base by appealing to their basest instincts. Neither are fit to govern. I don’t see a lot of virtue here, or comfort that giving them unfettered control over the government is going to advance the public’s interest.

  14. Just to endorse Jeff’s concern about ACA increasing the deficit…….

    I enjoyed rereading an article in Health Affairs, 29 #6, 2010, p 1136.

    One of the authors is Douglas Hotlz-Eakin, who is sometimes a hired gun for the right…..but in this article he is down to earth about unachievable savings and uncollectible taxes not really balancing out the cost of the subsidies.

  15. The point, Jeff, was to point out that most of the nuisance taxes and spending cuts so dolefully enumerated by David Howard, often cited on this or that items to underscore how awful the ACA is, were driven by a desire to finance the ACA.

    You opine that Congress will not follow through on the cuts called for in the ACA, and that may well be true. But do you know for sure. Would you, in 1992, have predicted that the monetary conversion factor for the RBRVS would have remained virtually constat for the next 20 years?

    One could say “what’s the point” about many things that get written; but it strikes me as better to engage on the subject.

  16. I’m in the “What, me worry?” stage of all of this.

    Uwe, this is the second post in a row where you’re basically tasking current Republicans with inconsistency/hypocrisy vs. their party’s actions a decade or more earlier. Again, what’s the point?

    That Republican party of Dole/Packwood/Heinz/Baker/Duerenberger- name some more moderate Republicans- no longer exists. What we’ve got now is an amalgam of throwback country club Republicans from safe suburban districts (with fake tans) and a bunch of bomb throwing, wreck-the-place populists, mostly from the south. There is no common agenda here. The present Congressional Republicans are a big tent alright, with a knife fight going on inside it between the pragmatists and the bomb throwers. Eventually it blows apart and/or we all get hurt.

    Part of the reason for the emergence of the latter was actually a reaction to Bush II’s unfunded Medicare drug benefit, to which you refer. It enraged a healthy fraction of the right wing of that party that they weren’t adhering to their small government principles. Et voila. . . .

    We’d have the same thing in the Democratic party if the Occupy Wall Street people hadn’t flamed out in a bunch of stoned out drum circles. Or like what we had in the mid 20th century inside the Democratic party with its hard core Dixiecrat, die hard segregationists. This isn’t a new phenomenon.

    Again, Uwe, so what? We have to play the ball from where it lies- on an island in the middle of an alligator infested swamp.

    BTW, I cannot believe that you, a distinguished economist, really believes that ACA was deficit neutral or mildly positive, as if Congress wasn’t going to come back later and wimp out on the small sacrifices you began by enumerating. This wasn’t as egregiously unfunded as MMA, but I’ll bet it’s damned close in order of magnitude of dollars ten years out.

  17. You can assume anything you wish. You would be wrong. Learn to read more carefully, especially as to who wrote what in comment. “Gary O.” whoever you are.

  18. I assume Bobby Gladd was referring to Prof. Reinhardt’s reply that …”this [Massachusetts’s law making Meaningful Use compliance a condition of medical licensure] is what happens when governments grant monopoly power.” I have no idea why Bobby is so upset. I suppose it’s because the federal government has been so accommodative to health care industry monopolies, he expects every state to roll over.

    Doctors in the United States have enormous political power. They have been able to get federal policies that limit the supply of doctors domestically by restricting the number of medical students. (“[T]he number of students accepted into federally funded residency programs has been capped at 85,000 for the past 15 years. In addition, federal Medicare payments have been cut by the federal health care reform law and many states face deficits that prevent them from contributing training funds, according to AAMC Chief Policy Officer Atul Grover.” http://www.advisory.com/Daily-Briefing/2012/08/30/Why-residency-programs-cant-fill-the-physician-gap) Not only that but U.S. immigration policies restrict “the number of foreign doctors who can enter the country. As a result of these protectionist measures, the United States pays more than twice as much for its doctors as other wealthy countries, costing it more than $90 billion a year.” http://www.cepr.net/index.php/blogs/beat-the-press/doctors-lobby-stiffles-study-to-examine-access-to-care

  19. I wish what you say were true, Mike; but it describes a bygone era when, yes, members of Congress of both parties would debate fiercely during the day and then go have a drink together at night.

    I have been on many Congressional retreats over the years where that was so.

    No more. At those retreats, Republican staffers and Democrat staffers drink at different watering holes, and their principals are not the chummy pals they once were.

    But in the old days they got stuff done. Tip O’Neill or Dan Rostenkowski worked quite well with Republican presidents.

    And the political center ran the show.

  20. Partisanship, as is on proud display here, is not helping us. You do realize, don’t you, that the same politicians yelling at each other on Cspan are partying together off camera. Their kids go to the same schools, they have adjoining beach houses in some swanky resort community, and they are laughing at all of you who buy into the lies they have carefully spun about how different they are. You may think you are clever, but what you have is childish compared to the sophisticated daily charade in DC. If you have a champion that you worship in the political arena then you truly are

  21. I was wondering what “Medicare genes” are.

    But this is what happens when governments grant monopoly power — as they do with occupational licensure. It comes with conditions.

  22. “At some point, more providers will be forced to stop seeing Medicare patients or will stop accepting new patients to their panels if the new lower payments are deemed inadequate.”
    __

    Look for accepting Medicare genes become a condition of medical licensure. You just watch. Massachusetts recently passed a law making Meaningful Use compliance a condition of medical licensure.

  23. What a carefree life you live, Jeff, to worry about that.

    I’ll get a new photo made and will send you the bill.

  24. For the record, I’ve said many times that we Americans should be prepared to pay for the services we demand or expect government to provide. Specifically, I think the broad middle class needs to pay for the broad middle class while the rich can largely pay for the poor as well as for themselves.

    While Republicans were able to pass the prescription drug benefit in 2003 without a funding source, aside from borrowing, I think the world had changed enough after the financial crisis to preclude a similar strategy to fund the ACA.

    People should understand, though, that the higher taxes on industry players including hospitals, insurers, drug companies and device manufacturers will be passed on to consumers in higher prices and insurance premiums in all likelihood. The additional 3.8% tax on investment income to be paid by taxpayers with incomes above $250K for joint filers and $200K for single filers is real though. Squeezing provider payments has its limits, however. At some point, more providers will be forced to stop seeing Medicare patients or will stop accepting new patients to their panels if the new lower payments are deemed inadequate.

  25. This is why the Republicans have so little credibility – at least to me.

    And to top it off, the Republicans refused to make the Feds buy generic. Think how much cheaper the Medicare drug benefit would be if the drugs were purchased generically from a formulary.

    A clear gift to big Pharma

  26. As Douglas Elmendorf Director of the CBO one summed it up concisely:

    “The United States faces a disconnect between the services that people expect the government to provide, particularly in the form of benefits to Americans, and the tax revenues that people are willing to send to the government to finance those services.” SOURCE: Congressional Budget Office, http://www.cbo.gov/ftpdocs/110xx/doc11047/05-13-CBO_Presentation_to_AAAS.pdf

    The question then is whether politicians should exploit this procolivity to their own political advantage. And when you look back, you come to the (for me) startling conclusion that Republicans, once styled as the fiscal conservatives, have exploited that dissonance more than have Democrats. Under Reagan the federal public debt tripled. By the time George Bush Sr. left, it had quadrupled from its 1980 level. Clinton and Rubin, with the assist of both the Democratic and after 1994 Republican Congress, held the line, turning the deficit into a surplus at the end of the 1990s. During that decade the public debt on net rose from $4 trillion to $5.6 trillion only. Under George Bush Jr., it grew again, from $5.6 trillion to $10 trillion by the time he left, with his last budget (for fiscal 2009 starting in October 2008) featuring a $1.2 trillion deficit.. The federal debt is now $16 trillion plus, but the ACA did not contribute to that, nor, to my knowledge, did the CBO project when the bill was passed that it would in the future.

    Every January or February, the CBO publishes a fascinating graph showing federal revenues and spending as percent of GDP from 1970 on. You will see that, starting in mid 2008, federal revenues as percent of GDP started to plummet. That contributed a lot to the deficits past 2008. Then automatic stabilizer spending kicked in, also contributing to the deficits. Finally, there was the stimulus package and some additional spending by deliberate policy under Obama. It is fair to wonder, though, by how much Obama’s and the Dems’ new domestic initiatives would have raised the deficit, if revenues had not plummeted and automatic-stabilizer spending had not kicked in.

    So I beg your forgiveness for thinking of a madam of a bordello teaching Sunday school when I now hear the folks who voted for the fiscally promiscuous MMA ’03 lecturing us on the virtues of fiscal discipline and on the perils of entitlement spending.

    Do you have that in your heart, Barry?

  27. It’s important to note that in 2003, federal debt as a percentage of GDP was far lower than when the ACA was passed in 2010 which made financing a new entitlement program with debt alone less problematic in 2003 than after the 2008 financial crisis. Moreover, the projected cost of the drug benefit in its first 10 years was also significantly lower than the estimated cost of subsidies needed to allow many of the currently uninsured buy health insurance or enroll in Medicaid. The prescription drug program cost also turned out to be significantly lower than the initial ten year CBO estimate.

    That said I find it frustrating that Americans are unwilling to pay for new entitlement programs with clear and transparent new taxes or increases in existing taxes. We need look no further than the attempt to provide Medicare beneficiaries with catastrophic insurance coverage financed, in part, with a tax surcharge on higher income seniors. That legislation was repealed not long after it passed in 1988 following the spectacle of seniors mobbing then House Ways and Means Committee Chairman, Dan Rostenkowski’s car in Chicago.

  28. Yes, Alvin, pay-go violates the Louis XIV spirit American voters like. It is a politically naive and self-destructive approach.

  29. Bob:

    You are right that when President Bush took over, the projected budget surplus for the coming decade was $5.6 trillion, of which about $2.5 trillion was off-budget stuff (mainly the Social Security and Medicare Trust fund balances), so that the then projected on-budget projected surplus was $3.1 trillion.

    But all of that vanished as a result of the poor economy Bush inherited from Clinton during 2000-2002 period, and as a result of the huge tax cuts that had been enacted by 2003. If you look at the CBO Budget Update of August 2003 — several months before the MMA ’03 was enacted — you will find CBO project an on-budget cumulative deficit of $3.833 for 2004-2013. If you added back the projected off-budget surplus of $2,436 trillion for 2004-13, to get at what is called the unified budget, CBO still projected a cumulative unified budget deficit (the headline deficit) of $1.397 trillion. See Table 1 here http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/44xx/doc4493/08-26-report.pdf .

    So your theory does not apply any more by November 2003, when the MMA ’03 was passed. You may recall that Paul O’Neill, former OMB director, was canned when he protested the financing of the MMA ’03 and Vice President Cheney famously lectured him that “Reagan taught us that budget deficits don’t matter.”

    So I do believe David Walker’s assessment does apply, don’t you agree?

    Best,

    Uwe

  30. Wasn’t pay-go installed when the Democrats took over in 2006? That would have prevented deficit financing of any legislation. I guess you could say that they shouldn’t have done that or maybe undone it for this legislation?

  31. The irony and (might we say) hypocrisy of the Republicans is well described here.

    I would make only a small qualification:

    — In 2003 we were coming off the Clinton budget surpluses, and the war in Iraq had not begun. An economist could have argued that future federal revenues would grow fast enough to cover the MMA. ( a naïve economist, t be sure.)

    I am coming to accept the principle that I think is called Public Choice theory. When benefits (and wars) are expanded without new direct taxes, the public underestimates their cost. This leads to the juvenile level of our policy debates.

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