Wednesday, April 06, 2011

More on the Ryan plan

While I don't want to get too deep into the name-calling and finger-pointing part of the biz, I will say it's pretty shocking that Ryan published a purportedly serious and "courageous" proposal based on economic projections that are simply absurd (unemployment down to 2.8%, stunning and unexplained increases in housing starts and GDP growth, etc.).

Two alternative explanations would be (1) he just doesn't care (requiring as well cynicism about whether actual credibility matters), and (2) epistemic closure caused him not to realize that the projections were absurd. But in a sense # 2 is a version of # 1, since one would likely be more careful to avoid serious and transparent errors if, say, one's own life were at stake.

It's certainly evidence in favor of those who say he's an ignoramus and a fraud.

But that said, let me quasi-almost-but-not-quite defend his Medicare proposal.

First, let's stipulate up front that the structural change he proposes for Medicare (which prominent Republicans have admitted, though not for attribution, is essentially repeal of the existing program) has actually no direct link to the long-term funding question. It's a separate structural change.

To explain, let's back up for a moment and recall President Bush's personal accounts proposal for Social Security in 2005. (I'm being nice here in using the term instead of "privatization," which is what the proponents called it as late as December 2004.) The Bush Administration admitted, with surprising honesty, that the proposal would do nothing whatsoever to address Social Security's funding shortfall. Instead, it used the funding shortfall as a convenient occasion for both (a) addressing the funding issue through changes that could essentially have been done through the existing program, and separately (b) changing the relationship within the program between taxes (or contributions, or whatever you want to call them) and benefits.

As I've written, I tend to dislike the way the existing Social Security program more or less deliberately obscures the relationship between what you pay and what you get. Some proponents like this deliberate obscurity as a political device for achieving greater progressivity within the program than one might otherwise have expected. But it also obscures big transfers within the system that we might dislike (e.g., from younger to older age cohorts, and from singles and two-earner couples to one-earner couples). And perhaps the confusing structure causes Social Security to discourage labor supply more than it would if the marginal tax-benefit relationship were better understood (and made more uniform).

So I like clarifying the tax-benefit relationship, as the Bush proposal did, although I might have preferred keeping some progressive redistribution in the program (but made more overt). I called this idea "progressive privatization" but it never caught on anywhere.

I was less thrilled about the Bush plan's inducing people to bet more of the baseline piece of their life savings on the stock market instead of having a fixed real life annuity that sound portfolio choice dictates holding as one's bedrock. But the ability to bet on the stock market was a distinct program feature from clearifying the tax-benefit relationship (privatization was an arbitrarily assembled package of distinct changes).

But back to the main point that parallels Ryan's Medicare plan. Whether one liked the set of proposed Bush changes or not, there was absolutely no true link between its merits and the long-term Social Security funding crisis (such as it is). If good, it should have been adopted even in the absence of any funding crisis; if bad, the funding crisis offered no reason to adopt it.

The same is true of Ryan's Medicare plan. We could put the current Medicare system on a sustainable path by shrinking the rate of expenditure growth under it (e.g., via reimbursement rates, the approved treatments list, co-payments and premiums, etc.). Or we can convert to Ryan's system, essentially vouchers for privately obtained health insurance, and achieve no budgetary improvement by letting the vouchers grow at the existing and expected rate of healthcare expenditure growth relative to GDP.

Ryan's projected cost savings come from constraining the rate of voucher growth. But suppose that actually doing this 10 years down the road is no less politically difficult than tightening the screws under the existing system. Then you may get no cost saving.

This strikes me as an extremely credible scenario. Why should Congress be loyal to the Ryan plan in 2025, when seniors who vote in large numbers start screaming about the affordability of care they want on the vouchers they're getting? (If we use quasi-constitutional budget rules that make this difficult, they could instead be combined with existing Medicare.)

In sum, therefore, there really are two distinct questions. One is how to put healthcare on a sustainable path (looking both at the federal budget and people's pocketbooks) given the growth scenario that we now face. The other is how the system ought to be structured.

If Ryan's design is better than existing Medicare, we should do it even in the absence of a long-term fiscal crisis. But if it's worse, then we should keep the existing system and tighten the fiscal screws via that.

All this does not rule out a political economy argument that adopting the Ryan plan makes tightening the screws easier to accomplish politically. But that would be a very different argument from the ones that we're hearing, and I don't see how it could be made convincing.

OK, what about arguments that Ryan's system would be economically much more efficient because it's more private market-driven? That admittedly might affect the fiscal tradeoffs - although serious healthcare economists such as Jonathan Gruber appear to reject it - but really it's just a part of the debate over which system is better in the fiscally sustainable steady state. After all, you'd want to be more efficient, all else equal, no matter what.

The case against a Ryan-style Medicare change concerns claims of pervasive market failure in healthcare, reflecting not just the quirks of the U.S. system but broader structural issues (e.g., consumer ignorance about desperately important treatment choice issues; problems of adverse selection; problems of moral hazard once we decide that we are unwilling to deny care to desperately ill people who can't pay for it).

The contrary position, that we should simply let markets work their magic in healthcare no less than in the market for fresh fruit or for shoes, is something that I disagree with but consider intellectually respectable. So in that sense I am inclined to be tolerant of a proponent of the Ryan plan (including Ryan himself), as within the realm where we value and may all benefit from open intellectual debate.

But the long-term fiscal gap appears to offer no particular support for Ryan's position.

One last point: perhaps it's not all that "brave" after all to count on Congresses 10 years from now to tighten the screws on healthcare spending growth in a manner quite distinct from anything that he actually proposes to implement currently. "Brave" would be advocating a large cut in healthcare spending TODAY, followed by a faster growth rate (to get to the same budgetary place long-term) given the stunning technological improvements that we have reason to hope will be available in the future.

UPDATE: Daniel McCarthy at American Conservative Magazine agrees with me that Ryan is not actually "brave" but loading all the pain off into the future so that other politicians would have to bear it.

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