When You Don’t Need To Worry About Facts

By James Kwak

Masquerading behind an invocation to “wisdom” in the title, David Brooks today finds his false equivalence (see here for another example) by comparing the the two parties’ approaches to Medicare: the Democrats, he says, favor “top-down centralized planning” while the Republicans favor the “decentralized discovery process of the market.”

David Brooks swallowing Republican talking points whole is not worthy of note, so I’ll just point out one: he calls the Ryan Plan a “premium support plan,” despite the categorial denial by Henry Aaron, the creator of the premium support idea.* But it’s marginally more interesting to point out Brooks’s finely-honed rhetorical dishonesty.

The first example is characterizing this difference as a “basic philosophical choice” between centralized planning and the market, when it’s really the difference between having a government health insurance system and not having one. Brooks echoes the Republican characterization of the Independent Payment Advisory Board (Paul Ryan’s “fifteen-panel board“) as a centralized planning bureaucracy and expresses skepticism that it can work. But IPAB is supposed to do the same thing that every private insurance company is trying to do: figure out how to provide incentives that will improve care at lower cost. All large companies have centralized planning; that’s how they get things done. One problem with Medicare is that its centralized planning committee is called Congress, and hence Medicare payment rates are highly politicized. The alternative to IPAB is running Medicare poorly. Criticizing government experts as central planning is just a more reasonable-sounding way of saying that government programs shouldn’t have planning at all, which is transparently crazy.

The other alternative, Brooks would say, is not having Medicare at all. But the Obama administration didn’t choose IPAB because they wanted Soviet-style centralized planning; they chose it because it was the only pragmatic, responsible choice. Based on everything we know about Obama’s economic and domestic policy teams, it’s much more likely that, if they had a clean slate to draw on, they would have preferred managed competition — the exchanges, regulation, and subsidies that the ACA creates for the under-65 individual market — for the entire population. They stuck with Medicare because (a) it’s politically popular and (b) it’s already the lowest-cost part of our health care system. Dismantling Medicare would be like pouring gasoline on a fire: it would only exacerbate the problem of health care cost inflation, since Medicare pays lower reimbursement rates than the private sector.

The real choice is whether or not to have a government health insurance plan for the elderly. And in evaluating that choice, Brooks invents a whole new category of rhetorical subterfuge.

“The fact is, there is no dispositive empirical proof about which method is best — the centralized technocratic one or the decentralized market-based one. Politicians wave studies, but they’re really just reflecting their overall worldviews. Democrats have much greater faith in centralized expertise. Republicans (at least the most honest among them) believe that the world is too complicated, knowledge is too imperfect. They have much greater faith in the decentralized discovery process of the market.”

Why is this brilliant? Most ordinary pundits (those without space on the Times op-ed page) use the more common device of citing studies on both sides to show that there is support for both sides. But this is rookie league stuff. Brooks shows how it’s really done: just dismiss the entire attempt at empirical support with a wave of the hand, which lets you get back to “philosophy.” It’s much easier to know nothing than to know something.

But for this question, we don’t even need to go to the academic studies. We already have a health care system where people “select from a menu of insurance plans. Their consumer choices would drive a continual, bottom-up process of innovation. Providers could use local knowledge to meet specific circumstances.” It’s called the individual market, there are tens of millions of people in it, and it’s a complete failure. It leaves tens of millions of people uninsured, and to those who are insured, it delivers mediocre care at high costs. The only way you can ignore this fact is by pretending that facts don’t matter.

Then there’s this gem: “if 15 Washington-based experts really can save a system as vast as Medicare through a process of top-down control, then this will be the only realm of human endeavor where that sort of engineering actually works.” Um, David, there’s this country to north of us. It’s called Canada. They have a national health insurance system that covers everybody. And that system . . . Whom am I kidding? When you don’t have respect for facts, a few more aren’t going to change your mind.**

I’m not expecting the Times to fire David Brooks anytime soon, but after his enormous, embarrassing gaffe with the Ryan Plan, can’t his editor at least get him to stop writing about Medicare?

* The difference is who bears the overall risk of health care cost inflation. In a premium support system, you have a market mechanism to promote competition, but you keep beneficiaries whole by making sure that the subsidies, in the aggregate, continue to pay the same proportion of health care costs. In a voucher system, like Ryan’s, you decouple the value of the subsidies from the cost of health care, shifting risk from the government to the individual.

** For those of you weirdos who do like facts, Krugman has charts on costs and quality. In the latter, Canada doesn’t do so well (although still better than the U.S.) — but check out the U.K., where not only health insurance but health care delivery is public?

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No, Gov. Pawlenty, Tax Cuts Don't Pay for Themselves

Republicans claim to be deeply concerned about the budget deficit and the national debt, yet repeatedly demand additional large tax cuts. For example, former Minnesota Gov. Tim Pawlenty, a candidate for the Republican presidential nomination, supports a balanced budget amendment to the Constitution but also wants an $8 trillion tax cut. He rationalizes this contradiction by asserting that his tax cut will not actually lose any revenue. As Pawlenty told Slate reporter Dave Weigel on June 13:

 

“When Ronald Reagan cut taxes in a significant way, revenues actually increased by almost 100 percent during his eight years as president. So this idea that significant, big tax cuts necessarily result in lower revenues – history does not [bear] that out.”

 

In point of fact, this assertion is completely untrue. Federal revenues were $599.3 billion in fiscal year 1981 and were $991.1 billion in fiscal year 1989. That’s an increase of just 65 percent. But of course a lot of that represented inflation. If 1981 revenues had only risen by the rate of inflation, they would have been $798 billion by 1989. Thus the real revenue increase was just 24 percent. However, the population also grew. Looking at real revenues per capita, we see that they rose from $3,470 in 1981 to $4,006 in 1989, an increase of just 15 percent. Finally, it is important to remember that Ronald Reagan raised taxes 11 times, increasing revenues by $133 billion per year as of 1988 – about a third of the nominal revenue increase during Reagan’s presidency.

 

The fact is that the only metric that really matters is revenues as a share of the gross domestic product. By this measure, total federal revenues fell from 19.6 percent of GDP in 1981 to 18.4 percent of GDP by 1989. This suggests that revenues were $66 billion lower in 1989 as a result of Reagan’s policies.

 

This is not surprising given that no one in the Reagan administration ever claimed that his 1981 tax cut would pay for itself or that it did. Reagan economists Bill Niskanen and Martin Anderson have written extensively on this oft-repeated myth. Conservative economist Lawrence Lindsey made a thorough effort to calculate the feedback effect in his 1990 book, The Growth Experiment. He concluded that the behavioral and macroeconomic effects of the 1981 tax cut, resulting from both supply-side and demand-side effects, recouped about a third of the static revenue loss.

 

Republicans also assert that the tax cuts of the George W. Bush years paid for themselves. On July 13, 2010, Senate Minority Leader Mitch McConnell said that there was no net revenue loss from any of the Bush tax cuts, in defense of an earlier comment by Senator John Kyl that all spending increases must be offset so as not to increase the deficit, but tax cuts need never be offset. Said McConnell:

 

“There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think what Senator Kyl was expressing was the view of virtually every Republican on that subject.”

 

This is a view not shared by economists who worked for Bush. For example, Alan Viard, senior economist at the Council of Economic Advisers during Bush’s first term, told the Washington Post in 2006, “Federal revenue is lower today than it would have been without the tax cuts. There’s really no dispute among economists about that.” Robert Carroll, deputy assistant secretary for tax analysis at the U.S. Treasury Department during Bush’s second term, also told the Post, “As a matter of principle, we do not think tax cuts pay for themselves.” On September 28, 2006, Stanford economist Edward Lazear, chairman of the CEA in Bush’s second term, testified before the Senate Budget Committee:

 

“Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves. Certainly, the data…do not support this claim. Tax revenues in 2006 appear to have recovered to the level seen at this point in previous business cycles, but this does not make up for the lost revenue during 2003, 2004, and 2005. The tax cuts were a positive step and have contributed to the enhanced economic growth, additional jobs, higher real disposable income, and the low unemployment rates that we currently see today.”

 

The truth is that no serious Republican economist has ever said that a tax rate reduction would recoup more than about a third of the static revenue loss. The following studies represent the generally accepted view among Republican economists.

 

● A 2005 Congressional Budget Office study during the time that Republican economist Doug Holtz-Eakin was director concluded that a 10 percent cut in federal income tax rates would recoup at most 28 percent of the static revenue loss over 10 years. And this estimate assumes that taxpayers have unlimited foresight and know that taxes will be raised after 10 years to stabilize the debt/GDP ratio. Without foresight and no compensating tax increases or spending cuts, leading to an increase in the debt, feedback would be negative; i.e., causing the actual revenue loss to be larger than the static revenue loss.

 

● In a 2006 article published in the Journal of Public Economics, Harvard economist Greg Mankiw, who chaired the CEA during Bush’s first term, estimated the long-run revenue feedback from a cut in taxes on capital at 32.4 percent and 14.7 percent for a cut in labor taxes.

 

● A 2006 analysis of extending the 2001 and 2003 Bush tax cuts by the Republican-leaning Heritage Foundation estimated that only 30 percent of the gross revenue loss would be recouped through behavioral effects and macroeconomic stimulus.

 

For the record, the CBO recently concluded that the Bush tax cuts reduced federal revenues $2.8 trillion between 2002 and 2011.

 

In short, there is no evidence whatsoever supporting Gov. Pawlenty’s view of the Reagan tax cuts or Sen. McConnell’s view of the Bush tax cuts. They didn’t pay for themselves and there is no reason to think that further tax cuts will, either. Esteemed Republican economist Alan Greenspan confirmed this fact last year on “Meet the Press.” Asked whether he thought that tax cuts pay for themselves, as Republican leaders had said, Greenspan replied, simply, “They do not.”

 

Reprinted from the Fiscal Times

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Don't Believe What You're Hearing About Budget Talks

My column from today's Roll Call talks about how all the rumors about what's being decided in the various budget discussions going on in and around Washington are likely wrong.

 

Don’t Believe What You Hear About the Budget Talks

•               June 21, 2011, Midnight

Last week was the point in this year’s budget negotiations when everyone’s worst fears about what would happen seemed to be on the verge of being realized.

The combination of increasingly happy talk about the summit being led by Vice President Joseph Biden and President Barack Obama’s golf outing with Speaker John Boehner (R-Ohio) seemed to have every blogger, pundit and interest group convinced that what they least wanted either was on the verge of happening or had already been agreed to.

If you listened closely, the rumors indicated that everything — from significant tax changes to substantial Social Security cuts — not only was on the table but was coming together in a package that would soon be ready for political prime time and would fly through the legislative process.

This is a routine part of the federal budget debate and the fiscal equivalent of one of the five stages of grief.

I first noticed it during the Andrews Air Force Base budget summit in 1990, when I received a series of calls from people inside and outside the Beltway who could not possibly know what was actually happening.

They all said one side or another in the negotiations had already agreed to the particular spending cut or tax increase they were most worried about.

Although some of those calls were from people who wanted to see whether I could confirm or assuage their fears, most were genuinely convinced that what they had heard or imagined was true.

For the record, my phone started to ring just as the Andrews summit was beginning — that is, while some of the negotiators were making opening statements and others were still trying to find the bathroom. It’s also important to note that virtually none of these “my-budget-sky-is-falling” concerns turned out to be true.

This year’s negotiations have already produced the same type of premature and very likely inaccurate misgivings as typically occur whenever those involved with the federal budget get together to talk about what can, should and needs to be done.

And this year there may be more reason to think that what someone considers a budget nightmare is going to come true given the magnitude of the problem, the few relatively easy deficit reductions that are still available and the paucity of spending and revenue options that numerically and politically are possible. (Note to deficit hawk groups: The formal and ad hoc recommendations you so publicly support are not as novel as you want everyone to believe because they are really little more than what’s available.)

But as is also the case at this stage of the budget negotiations, there are still many reasons to think the fears about budget nightmares are far more imagined than real.

This year, for example, it’s not at all clear that those involved in the budget discussions actually have the authority to negotiate a deal that will be accepted by enough Representatives and Senators to enact the legislation.

The antipathy of the tea party wing of the Republican Party for Boehner and House Majority Leader Eric Cantor (R-Va.) on budget issues has been both stated and demonstrated many times this year.

It also seems to have gotten worse since April, when 59 House Republicans defied their leadership and voted against the final continuing resolution for fiscal 2011.

Given that a debt ceiling increase is even more politically toxic than the CR, it’s likely that anything Boehner might agree to while playing golf with the president or Cantor agrees to as part of the Biden-led summit won’t be acceptable to large numbers of the House GOP caucus.

The same is true on the other side of the aisle because it’s not clear that an administration-negotiated deal will be acceptable to all Democrats.

This is especially the case now because the president’s Osama bin Laden bump in the polls is over and his approval rating again is hovering between 46 percent and 49 percent.

In addition, it’s becoming increasingly obvious to many that the almost guaranteed opposition by a substantial number of Republicans to a debt ceiling increase means that no bill can pass the House without substantial Democratic support. That math will prevent the president from agreeing to the type of budget agreement the GOP says it must have.

On top of everything else, there are strong indications that, contrary to initial statements by some on Capitol Hill, Wall Street will react negatively and that what so far has been limited pressure on Members of Congress to raise the debt ceiling will be substantially different in the not-too-distant future.

In recent weeks two of the three agencies that Wall Street relies on for bond ratings — Moody’s and Fitch — both issued warnings about the implications of not increasing the government’s borrowing limit.

Last week, Federal Reserve Chairman Ben Bernanke used some of the strongest language he has ever used when talking about fiscal policy to say that the debt ceiling should not be tied to deficit reduction.

The continuing threat of a default by Greece has clearly concerned investors. If worry about a country whose gross domestic product is almost a rounding error compared to the U.S. economy can roil the markets, what will a growing hint of a similar problem by the United States do?

Finally, there is the growing recent concern about the U.S. economic recovery and the worry about the effect of short-term deficit reductions on the GDP and unemployment that is increasingly in vogue.

This is why, like the calls I received when the Andrews summit got under way, much of what’s being said about a possible budget deal needs to be heavily discounted.

The current discussions may have been going on for a while, but in many respects, it’s still way too early in the process to think that anything has been decided.

 

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