Cutting Medicare

Cutting Medicare by mattsteinglass

November 24, 2009, 5:03 am
Filed under: Health

Megan McArdle doesn’t much like Ezra Klein’s point that if Congress won’t follow through with the Medicare cuts projected in the health reform bills, we’re all screwed, because if Congress won’t cut Medicare the government will go bankrupt. She says this is nonsense:

First, bankruptcy is not inevitable; it is theoretically possible to raise taxes to cope with Medicare growth, though it would be extraordinarily painful to do so. In the face of fiscal crisis, it might also be possible to make Medicare cuts that we have otherwise been unable to stick with.  But as any competent development economist will be happy to tell you, every dollar you add, or interest group you create, makes it less likely that this sort of resolution will happen….

Bankruptcy becomes much more likely, and more rapid, once we have used up the easiest source of funds we had to cope with our existing obligations.  This is true whether those funds are refund checks, or politically difficult spending cuts.

We have to recap the argument again, as usual. The CBO says health care reform shrinks the deficit through a combination of tax hikes, spending cuts, and (in the case of the Senate bill with its tax on employer health benefits) “bending the curve” on healthcare inflation. Yes, say McArdle and others, but many of the spending cuts are in Medicare and Congress will never really follow through on those. Well, says Klein, if Congress won’t follow through on Medicare cuts, the government is going bankrupt anyway. No, says McArdle, but (omitting a distracting analogy about buying a boat) 1. adding to the government’s other liabilities (even if they’re paid for) makes it more difficult to pay those Medicare liabilities, and 2. universal health insurance creates new interest groups which will protest against needed cuts in Medicare expenditures. So it makes it more likely that the government will go bankrupt.

Point one: it actually took me a long time to figure out what McArdle is saying here. She’s saying, okay, let’s say we need to cut $50 billion a year out of Medicare spending in 2030 to avoid defaulting on the national debt. That’s going to be harder to do if we already cut the easiest $20 billion to pay for universal health care starting in 2013. I think this is a very different argument from the one Klein is responding to. He’s responding to the argument that the cuts projected in the CBO score won’t happen. If that’s true, he’s correct: we are all screwed. McArdle is saying, okay, but if they do happen, they make subsequent needed reductions in Medicare harder. That’s a plausible argument. I would argue that it’s wrong because it looks at the political consensus around health care in the wrong way.

Right now, Medicare cuts are politically off-limits. You need to have a countervailing political claim to make them possible. The need to create universal health insurance coverage is that countervailing claim. Our political system has never been able to approach the idea of cuts to Medicare. Until now. Barack Obama is the first president who may be able to pass Medicare cuts, because he’s doing it as part of a bid for universal health insurance.

Point two: People who receive government subsidies for their health insurance and Medicare recipients are not one group who will stand together to oppose cuts. Rather, they are two completely different constituencies with almost no spillover who will fight against each other for government funds. I see no reason to believe that working-class families who get their and their kids’ health insurance subsidized will be more likely to defend budget-busting expenditures for seniors. I see plenty of reasons to think they will do the exact opposite. It would seem to me that from a pure-politics perspective, there will be more of a constituency for Medicare cuts with this reform than without it.

For that matter, McArdle herself has long been arguing basically the opposite of what she argues here, in terms of the political effects of universal coverage on the healthcare economy. In pretty much every country with government-regulated universal coverage (i.e. every developed country except America), government intervenes to drive health costs down, and governments deny expensive, ineffective care, because taxpayers have a limited willingness to pay. In other words, expanding coverage creates the political will to control healthcare inflation. Which is what Klein is saying too.

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