Paul Krugman points out today that once you take into account the lingering effects of the recession, it may very well be the case that there is no significant near-term budget shortfall at all. Once the economy has recovered, the budget may already be destined to come in at a level that would stabilize public debt as a share of GDP. The real problem we have in the short-run is that budget deficits are too low—and shrinking—not that they are too high and growing.
The least unpersuasive case for worrying about the federal budget deficit focuses on the long-term increases in Medicare and Medicaid that will result if health care costs follow their projected, steep upward pathway. If you accept this case (which should not simply be accepted as gospel), then you can stop listening to any purported “grand bargain” plan that does not address this projected rise in health care costs.
Yet, if the news reports have any validity, the “entitlement reform” side of the fiscal cliff negotiations has become focused on a proposal to increase the Medicare eligibility age by two years. This would deliver roughly $5 billion in savings to federal government in 2014. You might say that, given the hardship it would cause to so many near-retirees, this seems like an awfully small sum. But it’s worse than that. While this policy change might save the government $5 billion, it would increase health care spending system-wide by twice as much. In other words, the grand deficit bargain is centered on a proposal that makes the problem of rising health care costs worse.
There is a tried-and-true method of controlling health care costs—but it requires moving in precisely the opposite direction as this proposal. Many other countries are facing shifting patterns in government spending due to aging populations, but the United States is unique in the developed world in the amount of money it spends, per person, on health care; all in order to obtain slightly inferior health outcomes. Pick any wealthy country at random, and if the United States were to spend the same amount, per person, as this randomly selected country, the projected long-term US budget shortfall would disappear—completely. Why? The answer is that many other countries (with universal coverage) use the bargaining power of a government payer to control the per-unit cost of health care services. Raising the eligibility age for Medicare, making the government insurance pool smaller and sicker, moves us in the opposite direction.
You can either commit yourself to “reducing the size of government,” or you can commit yourself to getting health care costs under control, but you’ll have a hard time doing both.