I’ve been mulling for months about this old Megan McArdle post proclaiming Peter Orzag’s goal of “bending the curve” of health costs to be the Laffer Curve of the Left. The parallel seemed weak to me, and, up for an intellectual challenge, I’ve been trying to come up with a better one.
The problem is that while I’ve been a-mullin’, the analogy has completely collapsed. The CBO just scored the Baucus health care bill, and — guess what? — he bent it. To the tune of $50 billion in deficit reduction over 10 years. And, since there’s always room for improvement, Brookings has a few quite reasonable and realistic suggestions for bending it further.
As for the Laffer Curve, nothing’s changed there. Too many on the left treat it as a complete myth. It’s not: Art Laffer was perfectly correct in observing on his now-infamous dinner napkin that there’s a point at which taxes yield negative returns to revenue because of the damaging economic effects of high taxation. No, the myth was when he and an army of supply-siders went (and sill go) a step further and asserted that the U.S. was on the right side of the curve. Alas, we’re still on the left hand side [PDF]. So yes, tax cuts still decrease government revenue. In other words, it’s not that the Laffer Curve is fiction, it’s that it’s not a terribly useful tool in understanding contemporary America public policy.
As for my nomination for the left’s Laffer Curve — that is, an insight that is narrowly true but over-generalized for the purposes of political agenda — I’d nominate the 1992 Card-Krueger minimum wage study. It’s not nearly as well known to rank-and-file liberals as the Laffer Curve is to conservatives, but most progressives in positions of influence with more than a passing knowledge of labor policy have heard of it. The dime summary is that economists David Card and Alan Krueger found that employment in New Jersey fast food restaurants increased when compared to neighboring Pennsylvania restaurants after New Jersey raised their state minimum wage. It’s a completely counter-intuitive result, though it makes more sense if you model fast restaurants as a collective monopsony (single buyer) of low-wage labor. As for the economy as a whole, however, your standard Econ 101 logic prevails: raising the minimum wage probably increases unemployment.
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How interesting is this – I read the Card-Krueger minimum wage study in Orszag's class…and then a few weeks later Krueger showed up and talked to us.
Good post. I disagree with your assessment that the Baucus bill "bent the curve". It scored as a net deficit reduction, but that comes from how the particular revenues and expenditures specific only to this bill play out. I.e, he calls for enough spending cuts and taxes to offset the new spending.Bending the curve is fundamentally different, and refers to actually changing the rate of growth of health care costs – and not just for the government, but for the industry as a whole. This requires fundamentally changing the sector somehow, rather than simply making a specific bill deficit neutral. There is no clear indication that Baucus' bill would accomplish that better than the other bills. In fact, it leaves out key provisions like the public option that have greater potential to do so.
Typically, things that have the potential to actually bend the curve, like changing reimbursement rates to favor preventative care, or making investments in information technology to make the archaic system more efficient, are not scored by the CBO since they are by nature more speculative. But it's these same types of "game-changers" that are far more potent in the long run.
I think I'm in total agreement with you. The Laffer curve is logically sound; the debate (if there is any) is where we are on that curve, and whether increasing tax rates would increase revenues. (short answer, we are nowhere near that inflection point). Similarly, C&K showed that raising the minimum wage could increase employment, and there's sound micro theory behind that, too. But it only works if we're on a point on the wage curve that is, well, really low. (Which we are.)As for bending the health care curve, I haven't studied any of this, but my uninformed opinion is that monopsony power could help, but absent the public option, we're not going to get that. The other option is to reform incentives. We need to find a way to pay for outcomes rather than procedures and drugs. Until then, there's no real market, and we'll never know what we're buying and how to price it. Sadly, that kind of reform appears to be off the table — way off the table.
Sorry, I didn't mean to imply that the $50 bil in savings was in and of itself evidence of bending the curve, but there are several good curve bending ideas folded into the Baucus bill, though I agree with you that the public option ought to be added: http://politics.theatlantic.com/2009/09/what_baucus_got_right.php