April 19, 2010
Joe Lawler and Joe Stiglitz Agree!
Or, on economic costs versus budget costs
From American Spectator, Joe Lawler writes:
"The cost ... to the budget, though, is not the only relevant cost."
He then quotes the CATO institute and RAND in terms of assessments of the costs of the PPACA. I'm not qualified to speak to the RAND analysis, but I'll just observe that if we are going to go down the road citing total costs, we need to be consistent in our comparisons. Let me illustrate with a back of an envelope calculation, where we compare cumulative costs of operations in the Iraq theater of operations to PPACA.
Figure 1: Impact on budget, in billions of FY2010$, for Patient Protection and Affordable Care Act; in billions of FY2010$, deflated using CPI (dark blue bar); and additional "costs", billions of current dollars. Uses "moderate" scenario from Stiglitz and Bilmes (2006), and includes economic costs of US fatalities, injuries; and macroeconomic costs. Source: CBO, "H.R. 4872, Reconciliation Act of 2010: Estimate of direct spending and revenue effects for the amendment in the nature of a substitute released on March 18, 2010," (March 18, 2010), Tables 1 and 2; and Iraq costs from A. Belasco, The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11, Congressional Research Services (Sep 09), Table 3: budget authorization for DoD, State, and VA Medical; for CPI, historical from FREDII, and forecasts/projections from CBO (January 2010); estimates for additional economic and macroeconomic costs for Iraq from Stiglitz and Bilmes (2006), and additional PPACA costs as cited by Lawler and attributed to RAND.
(Caveats: I couldn't deflate the additional Iraq numbers, since I didn't have a time series on the estimated costs; but I suspect since many of these incremental costs would have been incurred in past years, the number is understated relative to FY2010$ costs. Also, since the "moderate" budgetary impact cited by Stiglitz and Bilmes in 2006 has pretty much already been exceeded, we can safely say the other economics costs they tabulated are not implausible. On the other hand, expressing future costs in nominal dollars over the 2014-19 inflates the additional costs associated with PPACA, insofar as the graph is concerned.)
There is, of course, an odd asymmetry, in the treatment of costs. The additional economic costs for the Iraq category do seem like costs to me (transfers to Rest-of-World via higher oil costs, cost-of-life calculations due to American casualties), while the "costs" that Mr. Lawler attributes to PPACA do have some offseting benefits: if one reads the RAND report, for instance, length of life is extended for some of the formerly uninsured, which adds to the "costs".
Well, all this argues for cost-benefit analysis. But of course, there seems to be great disagreement on tabulating benefits (For instance, I think implicitly some analysts ascribe zero weight to benefits extending quality and length of life to some previously uninsured -- perhaps they are undeserving. I leave speculation for others).
So, for my part, I'll stick to reporting budgetary impacts -- which to remind everyone, look like this (at least as scored by CBO).
Figure 2: Impact on budget balance, in billions of FY2010$, for EGTRRA; for JGTRRA; for Patient Protection and Affordable Care Act; and cumulative budget authorization for operations in Iraq through FY2010, in billions of FY2010$, deflated using CPI. Source: CBO, Budget and Economic Outlook: An Update (August. 2001), Table 1-4; CBO, Budget and Economic Outlook: An Update (August 2003), Table 1-8 (revenue implications only); and CBO, "H.R. 4872, Reconciliation Act of 2010: Estimate of direct spending and revenue effects for the amendment in the nature of a substitute released on March 18, 2010," (March 18, 2010), Table 1; and Iraq costs from A. Belasco, The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11, Congressional Research Services (Sep 09), Table 3: budget authorization for DoD, State, and VA Medical; for CPI, historical from FREDII, and forecasts/projections from CBO (January 2010).
I do believe we should be consistent, though. No mention of economic costs in Joe Lawler's March 2010 post on Iraq.
Update: Apr 20, 6:40pm Pacific
Mr. Lawler has a rejoinder here, where he asserts that I am double counting in Figure 1. But I was trying to give his argument the benefit of a doubt. Figure 1 (which on my own I wouldn't create) was inspired by this text in his original post:
... There are provisions in the bill that require private citizens to spend their own funds on health care, most importantly the "individual mandate" that makes purchasing insurance a legal obligation for everyone. ...
The logical implication is that one should add this "mandated" cost to the cost to the budget, since it is, allegedly, hidden the way the bill was put together. That is, we want a quantitative measure of the unfunded mandate. That's what is shown in Figure 1. But read his original article yourself and decide.
By the way, the true howler is unrelated to health care:
In deciding whether going to war in Iraq or anywhere I the public decision pretty much boils down to all-out war or nothing -- as far as the public's concerned, there aren't many different ways to invade a country.
Hmm, posing the question that way presupposes the answer. As alternative options I think there was containment, there was perhaps giving a little extra time to the inspectors (so that maybe we would've found out a little bit more about those aluminum tubes, etc.). In other words, there were a lot of other things we could've done besides invading the country.
Posted by Menzie Chinn at April 19, 2010 07:35 AMdigg this | reddit
When he's talking about the total additional cost to the private sector of health care reform, he doesn't seem to be accounting for the cost of medical treatment received by the people who have to comply with the mandate. When the uninsured need health care and can't pay for it, someone else picks up the tab. The mandate forces the uninsured to pick up the tab. That's not an additional cost to the private sector, it's simply shifting the cost to the person who receives the benefit of the expenditure.
The additional cost to the private sector should be the additional profits going to the health insurance companies due to the mandate, not all the money paid to the health insurance companies because of the mandate. So if individuals have to pay $1 trillion to health insurance companies because of the mandate, the additional cost to the private sector isn't $1 trillion. With or without the mandate, they are needing health care.
Posted by: Joe at April 19, 2010 11:27 AM
I was not a fan of invading Iraq. However, calculating cost-benefit is tricky, and it could be positive.
Consider, for example, the cost of oil. Let's assume Iraq manages to meet relatively modest expectations 2-3 mbpd of incremental supply after 2015. Increasing the oil supply today by that amount would reduce the oil price comfortably to $50, or $30 / barrel. That would be a savings of $2.5 billion per day, or $800 bn per year. On that basis, it's worth it on a purely financial basis all global effects considered. The direct benefit to the US would be about $180 bn per year; marginal given the investment.
But there are many, many factors to consider. For example, a low oil prices reduces the influence of Russia and the risk of war with that country. It permits more a more cordial relationship with China. It reduces the now-awesome pricing power of Saudi Arabia. How do you value that? It's not easy to do.
Posted by: Steven Kopits at April 19, 2010 04:01 PM
"So, for my part, I'll stick to reporting budgetary impacts -- which to remind everyone, look like this (at least as scored by CBO)."
Do you think we ever actually ran a budget surplus under Clinton, just because the combined budget (including social security) was positive?
I have a similar objection to characterizing the health care reform bill as fiscally prudent, merely because it was packaged with some tax increases. Tax increases are necessary to curb the unsustainably growing deficit. Instead they were highjacked to make expanded healthcare look fiscally prudent.
Posted by: don at April 20, 2010 01:26 PM
With all due respect and without entering into a discussion over whether it was 'just' to invade Iraq or not, in a cost-benefit analysis, when someone talks about costs, he/she should also estimate benefits; unless I missed something out, I don't see much about benefit estimations for the US economy, in terms of oil contracts, reconstruction contracts, political benefits and externalities, so on and so forth, which I imagine to be big, and which could amount to a net benefit and not a loss as presented by Prof. Stiglitz.
Posted by: Marwan Elkhoury at April 21, 2010 12:46 AM
Meh, this chart again.
The revenue increasing measures of the PPACA were not necessary or even that relevant to the actual reform of the health care delivery system here in the US.
You could just as easily and accurately spin the revenue increases as mitigating the cost of the Iraq War and make your graph say the exact opposite of what you want it to say.
If President Obama were to come out with a tax increase, and explicitly state that the revenue from it would fund the deficit created by the Iraq War, would you now call the war a fiscally prudent thing to do?
Posted by: Brad P. at April 21, 2010 06:06 AM
Brad P. If I am not being obtuse, the entire point of this debate has been the fact that the Bush Administration, regarding Iraq, regarding expansion of Medicare Part D, regarding EGTRRA and JGTRRA, refused to make any offsetting changes in policy associated with each piece of legislation. You can spin this "but these weren't part of health care" meme all you want, but if we want to implement fiscal responsibility (as opposed to just giving lip service to it), we need to start somewhere.
By the way, if the graph (in its various incarnation) distresses you so, please feel free to skip all my posts.
Posted by: Menzie Chinn at April 21, 2010 07:05 AM
I am all for implementing fiscal responsibility (I seem to be far more stringent in my demands than you), and I do not wish to white wash the horrible fiscal decisions of the prior administration.
The fact of the matter is that the PPACA was not fiscally responsible in the least.
Including irrelevant revenue boosts just to portray the bill as fiscally neutral does not actually equate to fiscal responsibility, no matter how many oversimplified graphs get thrown out there. This is especially true when you factor in the fact that all real and intrinsic health care reform policies got dealt away to lobbyists (the public option, drug reimportation, medicare and medicaid drug price negotiation).
Ultimately, I agree with you completely on the costs of the Iraq War, but if you want to do anything other than give lip service to fiscal responsibility, perhaps you should be more broad in your estimation of the PPACA and its fiscal ramifications.
And I quite enjoy your posts (and James' as well), and I do not plan on skipping your posts regardless of my opinion of that chart.
Posted by: Brad P. at April 21, 2010 12:52 PM
Menzie, do you not agree that there is a certain political slant involved in this chart?
Ironically, when fiscal stimulus was not an issue (monetary policy could be deemed sufficient to maintain AD), there was no apparent concern over fiscal balance. Now, when fiscal stimulus is direly needed, we sem to have discovered the need to at least appear to be more fiscally prudent. (Whatever happened to Cheney's 'deficits don't matter'?) Nevertheless, the healthcare reform by itself is simply spending more.
What amazes me is that in an industry with such a long lead time for production (it takes a long time to train a new doctor), no attention is paid to augmenting supply. Instead, the solutions all involve spending more, as if the immediate effect of demand increase could be anything other than an increase in price. The main effect is to re-ration away from the elderly and to the formerly uninsured. Tea Party activists are not fooled. And yes, they actually are more highly educated than the average voter (despite some effective caricatures to the contrary).
Posted by: don at April 21, 2010 07:06 PM
Am I the only one who finds this post obsessive and somewhat irrational?
Posted by: MPO at April 21, 2010 09:35 PM
Menzie: I guess this is a family spat. Only of interest to American nationals perhaps?
Joe Lawler who? And why would his ideas contradict or compliment Stiglitz's ideas? All these acronyms....
Posted by: GNP at April 26, 2010 08:48 AM