Digging into the Deficit

At the heart of the debt-ceiling debate is the question: How did the deficit get so high? It’s really pretty simple: We cut taxes, and healthcare got expensive. It all boils down to the next two charts.

The first chart refutes John Boehner’s mantra: “Washington has a spending problem, not a revenue problem.” We’ve got both.

spending and revenue

[Source: economist Jared Bernstein, who says he got it from the Office of Management and Budget. Here at the outset, I should justify the scales. I think there are only two legitimate ways to track government spending through time: as a percentage of GDP or inflation-adjusted per capita. A common conservative trick is to show raw revenues/expenditures tracking ever upward, which just proves that the country is getting bigger.]

Revenue (in blue) peaks just before the Bush tax cuts take effect, and then takes a second plunge when the Great Recession starts in 2007. Spending (red) is in a slow downward trend from the beginning of the graph until 2000. There’s a bump in 2000-2002 that could be blamed on a recession. (Recessions not only increase safety-net spending like unemployment insurance, they lower GDP. So spending-as-a-percentage-of-GDP gets a push from both sides.) But spending stays up (probably due to the Iraq War) during the tepid “Bush Boom” of 2003-2007, before jumping again when the Great Recession hits in 2007.

The second chart focuses entirely on spending.

health care spending

[Source: Christopher Conover at the conservative American Enterprise Institute, who attributes his numbers to the federal Bureau of Economic Analysis. This chart is about total government spending — state and local as well as federal — so the percentages of GDP are higher than in the first graph. It also goes back much further. The big spike is World War II.]

Conover notes:

Between 1966 and 2007, the entire increase in the size of government relative to the economy resulted from growth in tax-financed health spending.

And Matt Yglesias draws the obvious conclusion:

[G]rowth in government spending is overwhelmingly not the consequence of grasping liberals coming up with evermore things for the government to do. Instead, the government has for a long time shouldered responsibility for health care finance, and health care is very expensive.

So a more precise statement of the deficit problem is: We have a revenue problem and a healthcare spending problem.

Now let’s dig deeper into revenue. This chart shows revenue by type of tax:

taxes by type

[Source: The Department of Numbers blog. The vertical scale is percentage of GDP.]

Income tax stays within a range, with a blip up to create the Clinton surplus, and then a dive from the Bush tax cuts. (BTW: Unless you are willfully blind, it should be obvious that tax cuts do not increase revenue.) When this chart ends in 2007 we’re near the bottom of that range.  Payroll taxes (Social Security and Medicare — in yellow) go steadily upwards, while corporate taxes go steadily downwards from nearly 6% of GDP under Eisenhower to less than 2% now.

OK, so at the very least we have a corporate tax revenue problem.

Now let’s look at income tax. Conservatives make a big deal about how much tax the rich  pay — more than ever, by just about any measure.

tax burden of the rich

But that’s mostly because they are raking off a much higher percentage of the total national income. (In 50 years, when one guy is making all the income, he’ll necessarily pay all the income tax. Wouldn’t you hate to be him?)

In fact, the effective income tax rate (i.e., what they actually pay) has dropped considerably for the very rich, even as their income has shot up.

income and tax rates of the rich[Source: Ezra Klein, who attributes it to the economists listed at the bottom of the graphic.]

So: We have a problem getting revenue from corporations and the rich, and a healthcare spending problem.

Finally, let’s delve into that healthcare problem. Part of it isn’t a problem at all. As a society, we’re spending more on healthcare partly because the healthcare industry has better products than it used to.

A century ago, hospitals couldn’t do much more for you than a dedicated family member could do at home. Today, they can. People who a generation ago would have died in their 50s from heart attacks and cancer are surviving into their 80s and dying in nursing homes. It costs more, but personally, surviving into my 80s is precisely what I want to spend my money on. The option to buy a longer life is an opportunity, not a problem.

But there is a related problem: Compared to other countries, we’re not getting what we pay for.

Americans spend more, live less

[Source: University of California Atlas of Global Inequality. This data is from 2000, but things have only gotten worse since then, as the next chart will show.]

For all our healthcare spending, we live about as long as Cubans — four years less than the Japanese, and even two years less than our Canadian neighbors. (You might picture the Japanese living some spartan lifestyle we’d find unacceptable. But Canadians?)

And while all nations are spending more on healthcare — because everybody wants a longer life — the U.S. is pulling away.

rising American costs

[Source: Ezra Klein. The vertical scale is inflation-adjusted dollars per capita.]

And that’s the worrisome issue: If we’re on a higher exponential-growth path than everyone else, eventually healthcare spending will swamp the rest of our economy.

Total cost vs. government cost. Maybe you noticed I pulled a switch: The last two charts have been about total healthcare spending, not just government healthcare spending. Only about half of our healthcare spending goes through the government (Medicare, Medicaid, Veterans Administration, etc.).

If you think that government healthcare spending is the whole problem, then you do what Paul Ryan proposed: Replace Medicare and Medicaid with capped private health-insurance subsidies. The cap can be wherever the budget needs it to be, so the government-spending problem is solved.

But if total healthcare costs stay on their exponential path, they swamp the economy anyway. Eventually the government subsidies are tiny compared to the real cost of healthcare, and middle-class people start dying of curable diseases because they can’t afford treatment.

To an extent, it already happens. The U.S. performs badly in what public-health professionals call amenable mortality — i.e., preventable deaths.

preventable deaths by country

Now, I can’t see any democracy allowing middle-class people to die for lack of care, so either we’ll scrap democracy or government will end up paying for care no matter what Ryan’s projections say. And that’s why I focus on the total cost of healthcare.

Single-payer. Paul Ryan believes dialing back government funding will slow the rising costs, but his justification is a combination of wishful thinking and just-so stories about the market. The countries that get better results do the exact opposite: Virtually all their healthcare spending goes through the government.

All the evidence of actual countries tells us this: Government healthcare is more efficient than private healthcare.

In the private part of our healthcare system, the easiest way to make money is to shift costs to somebody else  — insure the people who don’t get sick — not lower the cost of care. (Ryan’s plan is similar — it shifts costs from the government to individuals.) Only single-payer systems, where there is nobody to shift costs to, deal with the real problem.

So the long-term answer to the healthcare spending problem is paradoxical: Extend Medicare to everybody.

In the short run, it will essentially double government healthcare spending. (Done right, this would be invisible to both the federal deficit and your personal budget. What you pay now in health-insurance premiums you would instead pay as taxes.) But in the long run, a single-payer system would get our costs (and outcomes) in line with countries that do healthcare much better than we do.

Summing up. So that’s my answer to the long-term deficit: End the Bush tax cuts at least for the wealthy and maybe for everybody (because the economy did fine with the Clinton tax rates). Close loopholes until corporate taxes get back to Eisenhower-era levels. And move to a single-payer system to get healthcare costs under control.

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  • By “Hear that, Fido?” « The Weekly Sift on July 25, 2011 at 11:05 am

    […] Digging Into the Deficit. When you gather together the rights charts and graphs, the deficit isn’t that complicated: We cut taxes too far, and healthcare costs are rising exponentially. […]

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