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How the McCaskill-Corker spending cap could increase deficits

at 08:52 AM ET, 04/18/2011

On Friday, I wrote in some detail about the Second Worst Idea in Washington: the Corker-McCaskill spending cap. But all I had time for was an explanation of why responding to an accumulation of debt by putting a lid on spending doesn’t make sense. At best, it’s a category error that suggests ignorance about what’s driving both spending (aging population, health-care costs) and debt (health-care costs, tax cuts). But I didn’t get into the “at worst.” So here it is: At worst, it’ll leave you with more, not less, debt and a more inefficient, wasteful government.

In practice, a spending cap encourages lawmakers to figure out how to hide spending in the tax code. Spending $150 billion to help people purchase health-care insurance counts toward the spending cap. Passing a $150 billion tax break to help people buy insurance doesn’t. Hence, passing a spending cap doesn’t give you an incentive to stop doing the things that require spending — those things are popular, after all — so much as it gives you an incentive to spend indirectly. And indirect spending is often inefficient spending.

Health care is actually a very good example here, as it’s (a) what’s actually driving our spending and (b) an issue where a spending cap is likely to make costs go up rather than down. Most working-age Americans get health-care insurance subsidized through the tax code, which will spend $660 billion over the next four years helping employers provide health-care insurance to their employees. Economists on the left and the right believe that this tax break is a prime driver of our country’s insanely high health-care costs: Workers don’t know how much their health insurance really costs, and employers are getting a 30 percent discount for giving workers health benefits rather than wages, and so no one has the direct incentives they’re supposed to have to keep costs down.

In other developed countries, the government just provides the insurance directly. The result? In 2008, America’s crazyquilt of public and private options left us spending more than $7,500 per person on health care — and that’s despite the fact that 50 million Americans are uninsured and tens of millions more are underinsured. That same year, Canada spent $4,079 per person. France spent $3,700. Britain spent $3,129. And no, we’re not living longer than they are, nor getting obviously better care. The irony is that if our health-care spending were more in-line with international norms, we’d have no deficit problem at all, and thus no misguided push for a spending cap. This graph from the Center for Economic and Policy Research shows what would happen to our budget deficit if we had the same health-care costs we see in other countries.

Here’s the bottom line: Our spending and our deficits are driven by health-care costs. Our health-care costs, as even the most cursory international comparison will prove, are worsened by the inefficient and indirect system we’ve developed to keep the government from directly purchasing health-care insurance for most Americans. We’re paying a very big premium to avoid becoming a socialist hellhole like Canada. That premium is what Sens. Corker and McCaskill are proposing to address by ... giving future legislators another arbitrary reason to prefer indirect subsidies and tax breaks over direct spending. And, as of yet, there’s no sign that this is merely a very wonkish prank.

 
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