KausFiles

Obama’s “no spending problem” fallacy

Dept. of Fake Budget Sophistication: Speaker Boehner says that, in his recent budget negotiations with President Obama, the president told him “we don’t have a spending problem.” Instead, Obama said, the government has a “health care problem.”

This seems to be one of the semi-official pilllars of Obama’s thinking–that future deficits are driven by Medicare and Medicaid spending, not spending bloat generally. Even AEI’s James Pethokoukis concedes Obama is “more or less right about that.”** So what’s the problem with “no spending problem”? The problem is that money is fungible. If you’re spending too much on health care, one way to pay for it is to raise taxes. But another way to pay for it is to cut some spending elsewhere and use that money to pay for the health care. Suppose we had a retirement program (let’s call it “Social Security”) that was scheduled to soak up 6.2% of GDP a quarter of a century from now–but by cutting benefits for the most affluent third (means-testing) we could lower that to, say, 5.2%. That’s a full percent of GDP we could apply instead to Medicare and Obamacare.

If you go buy a fancy new car you desperately want, do you have to pay for it by driving more efficiently, or by working harder, on the grounds that you don’t have a spending problem, only a “new car problem”? Or can you cut back what you are spending on clothing and travel–maybe rent out your vacation home?  You can do that even if clothing and travel and vacation homes aren’t growing as a proportion of your budget.

Those are the sort of money-shifting tradeoffs Obama’s compartmentalized view irrationally rules out. He’s telling fat-and-happy Washington–all the redundant civil-rights enforcers and consultants and conference organizers–not to worry. They’re not the problem. They’re paid for! There’s no general crisis, or even a general “problem”–it’s all health care, and must be solved somehow by unspecified medical efficiencies we’ll think up later (plus tax increases). Why not instead get what Obamacare and Medicare care efficiencies we can and then use the government’s other giant program, Social Security, as a cash cow to pay for much of the rest? And maybe cut general government bloat to pay for even more? (Pethokoukis proposes a “Romney Commission.”) Every unnecessary federal employee RIFed today is an expensive operation we don’t have to deny Granny tomorrow …

Backfill: Megan McArdle made a similar point. Plus she has charts putting in perspective a) the portion of the budget devoted to health care (it’s less than you might think) and b) the rise in U.S. health costs compared to Europe. …

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**–Some numbers from Pethokoukis:

I assume what Obama means is that the long-term debt problem is due to Medicare and Medicaid, not discretionary spending. And he’s more or less right about that. According to CBO’s alternate fiscal scenario, the US will spend 35.7% of GDP in 2037 vs. 22% in 2012. Where does that 13.7 percentage point rise come from?

– Medicare spending increases by 3.0 percentage points, from 3.7% to 6.7%

– Medicaid spending increases by 2.0 percentage points, from 1.7% to 2.7%

– Social Security spending increases by 1.2 percentage points, from 5.0% to 6.2%

– Interest on the debt increases by 8.1 percentage points, from 1.4% to 9.5%

And discretionary spending? It actually falls by 2.0 percentage points, from 11.6% to 9.6%.