Saturday, June 11, 2011

The CBO Report Part II: Further Considerations

Here I continue with a discussion of the Congressional Budget Office's report on Rep. Paul Ryan's proposal (Part I is the blog from two days ago).

As I pointed out in Part I, most of the CBO report was concerned with the healthcare issues raised by Ryan's plan. Although the plan is talks about radical cuts government spending, the only details that Ryan supplies are in his privatization scheme for Medicare. Since I have already shown in numerical detail how that would, in effect, help balance the budget on the backs of the retired and elderly, I'd like to take a look at the more general scope of the Republican plan as reported in the CBO document.

First of all, CBO makes the following deficit projections, as percentages of Gross Domestic Product or GDP. ("As is" means under current law; the signs -/+ mean, respectively, deficit and surplus):

Product (GDP):
Year:     2010     2022     2030     2040     2050

As is:     -9%    -2.75%     -4%     -4.5%     -4%

Ryan:      -9%       -2%    -1.75%   +.25%   +4.25%

The report projects that current cumulative debt would reach 90% of GDP under current law by 2050, but only 10% under the Ryan plan. Many economists would describe a public debt of 90% as being "unsustainable."

At this point we must note the following from the CBO report:

1. Although the Ryan plan specifies a sharp reduction in non-health spending "from 12% of GDP in 2010 to 6% in 2022 and 3.5 % by 2050...the proposal does not specify the changes to government programs that might be made in order to produce that path" (my italics).

2. The Ryan plan would reduce non-health and non-Social Security spending "far below historical levels relative to GDP" (p. 4).

3. Even the CBO suggests that "It is unclear whether and how future lawmakers would address the pressures resulting from the long-term scenarios or the proposal analyzed here" (p. 4).

In effect, the CBO is wondering what will happen when either government debt rises to "unsustainable levels" (if it ever does), or what will happen when severe cuts in non-health spending mandated by Ryan's plan compromise government programs designed to insure the quality of our food, water, air and roads, and the enforcement of our laws. We've already seen that the Ryan plan virtually guarantees that all but a tiny wealthy minority of retirees will not be able to afford the $2000 per month per person estimated cost of obtaining "Ryan-care" in ten years (see the CBO figures I report on in Part I).

The philosophy of the Republican plan is well-captured by the following telling quote from the CBO report (p. 14).

"The proposal would change the nature of the entitlement under Medicare and Medicaid. Current law prescribes the health care benefits to which people are entitled, and the federal government pays whatever is needed to honor those entitlements. The proposal [Ryan plan] changes that entitlement to a fixed federal contribution."

Again, on page 17, we read:

"Although the uncertainty in future federal spending on health care would be lessened under the proposal, that uncertainty would be transferred to future beneficiaries. If the volume, complexity, and costs of medical services turned out to be greater than expected, future beneficiaries would pay higher premiums [to their profit-making private insurance company] and cost-sharing (i.e. deductibles, caps and copays] amounts than are currently projected."

Unlike the recent 2010 Health Care Act, which cuts costs of healthcare by having panels of doctors and other experts evaluate the effectiveness of various treatments, the Ryan plan rations healthcare by economic means. A fixed dollar amount, which is not geared to actual increases in healthcare costs but to a slower-rising index (Urban CPI), will almost immediately be inadequate to pay premiums for average senior citizens. While Republicans decry attempts to control costs by rational and democratic means, they are in effect controlling benefits by direct economic rationing.

By extension, the same philosophy underlies the Republicans' approach to government in general. Instead of asking what our citizens need, they specify how much we can spend -- and never how much we can raise collectively -- and then let the chips fall as they may.

The Congressional Budget Office did its job in evaluating the Ryan budget proposal -- at least as far as it could, given the lack of details in the proposal itself. However, it is important to note the limitations of the report.

1. Continuing Medicare as is -- the Extended-baseline-scenario -- or even granting some of the reforms of the Health Care Act of 2010, are not the only alternatives. Greater control of private profits -- say of the Pharmaceutical companies, which charge other countries far less for their medicines -- can save more money; so can a more effective public voice in covered treatments. Preventing doctors from having a financial interest in medical technology -- for example, owning MRI companies (see: GAO report) -- can save a tremendous amount of money in diagnosis and treatment. Instituting a Single-payer or "Public Option" would save the most, since it would eliminate payments to stock and bond holders -- unearned money lost to the healthcare system. Single-payer is a far less radical and more democratic idea than just about anything in the Ryan plan, and would change the whole set of axioms that restrict the CBO analysis; it also has lot of public support.

2. Returning to reality in the form of analyzing the plans in other countries (even, gasp, Europe) would help find out why they can spend less and get better results (better care) than we have been able to obtain.

3. We can save vast amounts of money, and cut our deficits dramatically, by Bringing Home the Troops. We can cut the billions we spend on unnecessary overseas military bases: Japan and Europe certainly come to mind. These savings don't figure as alternatives in the CBO report of course.

4. Cut subsidies to businesses that don't need them: Big Oil and Big Agri certainly come to mind.

5. Institute a sales tax on stock and bond sales and purchases. A small percentage (say 1/4% on both seller and purchaser) would hardly affect serious investors, but would make speculators think twice about the thousands of churning trades per second they make, which extract money from our economy without any productivity.

Finally, as many have pointed out, we need deficit spending now, to help restore our economy and provide jobs and tax revenue to our country. Nobody was worried about what deficits might be in 2050 when we had decent employment and before Wall Street cheated us. There is not a whit of evidence to support the idea that draconian tax cuts will at all restore our economic well-being; in fact, the evidence is just the opposite.

These are all things that the CBO report could not discuss given the narrowness of its appointed task. Instead of bankers, we should read economists such as Paul Krugman and Joseph Stiglitz (both Nobel winners) to find out what we should be doing in the next few years, as well as in the next 20 - 30 years: the two things are not the same.


  1. Winning a nobel prize on international trade patterns does not make Krugman any more or less reliable than another economist who believes that additional deficit spending is not the right solution to our current problems.

  2. I think it does. So do lots of other people.

  3. So Krugman should be paid more attention than other economists who didn't earn a Nobel prize on international trade flows since that somehow makes him more knowledgeable on the deficit and the overall economy? Oh please. That's almost as dumb as saying the PTR doesn't like Warren because she doesn't work for a bank yet somehow they approved of Geithner even though he's a civil servant for most of his career. (but that's another topic...)

    How does a Nobel prize on international trade patterns make his opinion any more qualified than other economists like Martin Feldstein or John Taylor?

    He is just one academic. He has never created a job. He has never run a company. The closest he has come to the "business world" was probably being a paid advisor to Enron. A guy who wrote that Fannie Mae and Freddie Mac weren't a problem because "they didn't do any subprime lending"...oops. I guess he missed the trillions of subprime debt that they bought up and helped finance.

    Harvard economics professor Robert Barro summed it up perfectly - Krugman "just says whatever is convenient for his political argument. He doesn't behave like an economist."

    Krugman is a partisan hack. 10 years ago, with deficits around 2-3% of GDP he said ""I'm terrified ... we're looking at a fiscal crisis that will drive interest rates sky-high ... the conclusion is inescapable ... the task is simply impossible ... the fiscal train wreck, is already under way."

    But now? Don't worry, says Mr. Krugman. Be happy. Just spend our way back into prosperity.

    Gee...I wonder if Mr. Krugman's opinions are influenced by who's in office...

  4. Well, you took a lot of what Krugman said out of context. Readers can judge for themselves:

    Krugman on Fannie and Freddie:

    (I think what he said here was pretty sound. He was talking about the CAUSES of the crisis, not whether Freddie and Fannie were sound or in danger; in fact, he acknowledged that they were in trouble.)

    Krugman on Fiscal Train Wreck:

    (In fact, he pointed out the very fiscal crises that we face now. Interest rates didn't go through the roof because the banking crisis was far more severe than the deficit crisis -- which we now face. He also mentioned the possibility of a Japanese-style deflation -- something that actually occurred in spades. Interesting to compare his warnings with the Bush economists who said deficits don't matter and everything was fine -- until 2008 that is).

    Look, there is no love lost between Krugman and Barro; Krugman called Barro's ideas "boneheaded." Calling names does not make either economist right.

    Maybe you can argue (as does Barro) that tax cuts are far more efficient stimuli than spending. Or you can argue the opposite, as does Krugman. But what evidence is there that cutting important government programs (e.g. Medicare and Medicaid), regulations (banking, environment) and inspections (food, drugs), while cutting taxes for the rich, is effective? The disappointingly slow recovery after the Bush cuts and the subprime/investment banking disaster should disabuse us that idea.

  5. For an indication of how far off-the-wall Barro's unemployment ideas are, check out

    Also, Anonymous seems to be getting his rhetoric from Republican talking points when he says (of Krugman): "He is just one academic. He has never created a job. He has never run a company."

    Interesting. Anonymous' hero Robert Barro tells us that unemployment insurance, which is not remotely close to paying what a job pays (in wages or benefits), causes people to remain voluntarily unemployed, since they'd rather loaf. What expertise does Barro have, as an academic, on being unemployed and choosing to loaf it out? Who knows?

    Anonymous should be a bit more careful and critical in his reading of the "let-them-eat-cake" philosophers.

  6. Fannie Mae and Freddie Mac were certainly one of the causes of the crisis. Without having a government backed entity to buy so much of the toxic debt, would it have been originated in the first place? I doubt it. Again, just because one has a Nobel prize in an unrelated field isn't a reason to put his thoughts on a higher pedestal than somebody else's.

  7. Disappointingly slow recovery after the Bush tax cuts? Compared to what, the strong recovery during the Reagan years after his tax cuts? Maybe you think it wasn't enough, but prior to the 2003 tax cuts, GDP growth was less than 2% and after the tax cuts it increased to over 4%. If only we could see 4% GDP growth for a number of consecutive quarters coming out of this recession.

    And "de-regulation" as a cause of the subprime crisis is another myth that you've probably read about on the partisan Media Matters site. How is that the case when even before the Gramm-Leach-Bliley Act investment banks were allowed to issue and trade financial products like mortgage backed securities, derivatives, credit default swaps and collateralized debt obligations. Lehman Brothers, Bear Stearns, Merrill Lynch, and AIG's activities were not a result of the GLB Act. If the GLB Act was never passed, those firms would have been able to do the same things which got them into so much trouble. The off-balance sheet activities were also allowed prior to the GLB Act. But it sounds good, doesn't it, to throw around buzzwords like "deregulation" as a cause to the subprime and banking crises? We need to look at the failure of the regulation, and not some stupid talking point about "deregulation".

    Blogmeister should be a bit more careful and critical of his reading of ultra partisan sites like "Media Matters". We've seen Stimulus 1.0 do very little to spur GDP growth or bring down the unemployment rate. But people like Krugman think we need to just rinse, lather and repeat the experiment a second time and throw trillions more at the problem. Spend our way to prosperity!