How We’re Paying for Health Care Reform

Greg Mankiw takes another crack at health care reform pedagogy:

I have a plan to reduce the budget deficit.  The essence of the plan is the federal government writing me a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit.  Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit.  But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

Healthcare reform, its advocates tell us, is fiscal reform.  The healthcare reform bill passed last year increased government spending to cover the uninsured, but it also reduced the budget deficit by increasing various taxes as well.  Because of this bill, the advocates say, the federal government is on a sounder fiscal footing.  Repealing it, they say, would make the budget deficit worse.

So, by that logic, giving me $1 billion is fiscal reform as well.  To be honest, I don’t really need the money.  But if I can help promote long-term fiscal sustainability, I am ready to do my part.

Cute. And also correct, as far as it goes. PPACA doesn’t reduce the deficit over the next 10 years primarily through miracle gains in medical efficiency (though it does have a few interesting vehicles for controlling costs). It reduces the deficit mostly because it raises more revenue than would be necessary to cover its costs.

On the other hand, Mankiw’s analogy doesn’t do justice to the policy trade-off here. I think the entire spectrum of Americans would agree that  giving Greg Mankiw $1 billion is a waste of money, certainly if it were paid for with higher taxes. But what about allowing 32 million Americans access to health insurance? All Americans (save the Mankiw family perhaps) would in principle agree that that’s a far more worthy cause, though naturally some may not still be willing to pay anything in higher taxes for such a benefit, while others would be willing to pay but only if the system conformed to their ideological preferences, etc.

A better analogy to what Greg’s getting at might be a parent paying for college. Say I took an extra part-time job to pay my sons’ tuition bills, but the hours were inflexible and I ended up making more after taxes than would be necessary to pay the university (say I only needed to work 14 hours to meet our contribution but my boss insisted on 20 hours of labor). Net, the family budget is better off. I bear a significant burden, however, because I work more than I did before, and most of the fruits of my extra labor don’t go directly to me (since I love my sons though presumably I still gain plenty of personal utility from putting them through college; indeed, the fact that I willingly entered into this arrangement reveals that I prefer their education over my leisure time).

Now, under Greg’s logic, he’d pour through the Tedeschi family budget and tell me that though my extra work is technically helping the household bottom line, it’s all an illusion: college is a huge expense and only getting more expensive, and the main reason we’re making more money is that I’m working slightly longer than necessary to meet that need. So if I quit my extra job and cut off my sons from further support, I wouldn’t be much worse off, if at all. Yes, I’d lose that extra little bit of income I got to keep, but I’d also get all that free evening time back, which I do value.

My response would be 1) though there is some evidence that its benefits are waning, college is still a worthwhile investment, critical even; 2) I want my sons to go to college; 3) if I quit my job and cut off my sons, they’ll likely have to drop out of college, which, given #1 and #2 above, is an outcome I want to avoid; and 4) paying for college by working more (or saving ahead of time, etc.) is what responsible families do.

Likewise, with health care reform: PPACA at it’s most basic is a law that spends money to broaden health insurance access to 32 million extra Americans and pays for it through a combination of tax hikes and spending cuts, with a little extra left over (~$200 billion over the next 10 years) that the government can use for deficit reduction. Total repeal would increase the deficit because those spending cuts and tax increases would no longer be on the table, and of course we would no longer be covering all those currently-uninsured Americans.

To wrap it all up: Greg’s right about the role of tax hikes in PPACA’s deficit savings, but his argument is essentially an assault on responsible budgeting. The 111th Congress wanted to extend health insurance access to most uninsured Americans, so they found a way to do it, and they paid for it. Now, naturally there are policy disagreements about they way they’re doing it and the worthiness of the endeavor in the first place, but it’s disconcerting that someone as prominent as Greg Mankiw has decided to attack the principle of, you know, not deficit-financing new spending. Then again, as Ezra Klein point out, maybe it’s not such a surprise after all.