Monday, September 12, 2011

Misperception about our Problems

Ross Douthat has a column today on the mistakes Obama made with the stimulus, framed against Congressional testimony from Alice Rivlin.  I agree on the critique of the over rosy projections and while I don't agree with his critique of the policy mix its a plausible critique.

However, he also says:

Finally, instead of pivoting from the Recovery Act to deficits and entitlement reform, the Democratic majority spent all of its post-stimulus political capital trying to push both a costly new health care entitlement and a cap-and-trade bill through Congress. Both policies were advertised, intermittently, as deficit reduction, but neither came close to addressing the real long-term drivers of the nation’s debt.
 Bullshit.  Health care is THE problem with our budget.  While the PPACA is far from perfect, it is better than anything else that has been on offer for more than a decade.  Getting health care right will get us more than half way to getting our finances right.  Less distortionary taxes such as cap and trade will get us a good chunk of the rest of the way (I've been reading a lot of tax literature recently, as long as it is not assumed that market failure is impossible pollution taxes become an optimal way to tax capital, and taxing capital is necessary for efficient taxation as long as labor supply responses are included in the model, of course, many studies exist that don't include these factors, which give the unsurprising result that taxing capital is not optimal, don't include potential theoretical downsides to a policy and guess what, there won't be a downside in your model, surprise, surprise).

My question really, is what Douthat means by, "prioritize Medicare reforms over a more comprehensive health care overhaul."  During negotiation over the PPACA many of the cost control provisions were stripped.  What exactly does Douthat have in mind?  Raising the Medicare age?  Privatizing the entire program and drawing magic graphs, like Heritage did for Paul Ryan*?

Simply privatizing people's health expenses will of course help the Federal debt, but it will just weigh even heavier as a cause in stagnating increases in real living standards and on corporate balance sheets.  It would just be another instance of socializing losses on the American people, while likely privatizing gains among those that benefit most from lowered taxes.

What exactly are these long term drivers of America's debt that haven't been addressed?  I don't think these issues have been addressed optimally, but both the PPACA and cap and trade were strong steps in the right direction.  What is Douthat's plan, getting a think tank to draw a magic graph about the wonders of privatization?

* I don't think it can be pointed out often enough just how absurd the assumptions are behind some of the critiques of Obama's policy. The fact that anyone takes this guy seriously is appalling.

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