IF YOU LOOK AT the Berkeley and Brookings Institution projections that we have cited the past two days, two factors overwhelmingly explain the looming budget crisis. The first is the rising cost of servicing the national debt: In 2004, this comes to 1.4 percent of gross domestic product; by 2040, it will have shot up to 11.9 percent. The second is the growth in health programs for the old and poor. In 2004, the combined cost of Medicare and the federal portion of Medicaid comes to 3.8 percent of GDP; by 2040, it will come to 10.1 percent. To put that in perspective, the projected increase in health spending is nearly three times bigger than the projected increase in Social Security costs. And this forecast assumes that medical spending per beneficiary rises more gently than it has in the past. Extrapolate existing health inflation, and Medicare dwarfs all other budget challenges.
The good news is that huge savings are possible in this area, though it would take huge political will to realize them. The United States currently spends 15 percent of GDP on staying well, fully six percentage points more than the average in rich economies. Some of that disparity is unsurprising, because America is richer than the average rich country: The more prosperous a society, the greater the proportion of its income it's likely to spend on health. But Uwe E. Reinhardt of Princeton University has calculated that U.S. prosperity explains only half of the six-percentage-point disparity. The other half reflects the waste that follows from a system in which doctors decide when care is necessary while also profiting when care is given.
Even if this waste were confined to private health care, fixing it would help the federal budget. Most private health spending is tax-exempt, so squeezing those dollars into other segments of the economy would increase the tax take. But the truth is that inefficiency is rampant within Medicare as well. Elliott S. Fisher of Dartmouth Medical School has demonstrated that some parts of the country spend twice as much as others per Medicare patient, even after adjusting for regional differences in patients' health status and the cost of medical care. Moreover, Dr. Fisher has shown that low-spending areas produced health outcomes at least as good as those in high-spending ones. If all regions could emulate the most efficient fifth of the country, the cost of Medicare would fall by 30 percent.
Enforcing efficiency will not be easy. Expensive regions are expensive because they have lots of hospitals and doctors; the medical folks are good at marketing their services. If the feds capped the number of heart surgeries or MRIs in each region, two things would happen: Doctors would market themselves even more aggressively to non-Medicare clients, and retirees would stage a revolution against "rationing."
Suppose, in the spirit of this series, that this political constraint could somehow be overcome. What would that do to the future budget deficit? A 30 percent cut in Medicare spending in 2040 would save just over 2 percent of GDP; a similar cut in private health spending would boost the tax take, bringing the budget impact up to around 3 percent of GDP. With the 2040 deficit projected at 20 percent of GDP, this won't fix the problem.
Indeed, if you add together all the remedies discussed in this series, you're still a long way from salvation. Assume savings worth 3 percent of GDP from health plus 1 percent from Social Security plus 3 percent of GDP in extra tax revenue as a result of higher-than-expected growth, and you've reduced the projected budget gap by 7 percent of GDP -- a third of what's needed. Pushing through any of these reforms would also reduce the government's interest costs, so allow a few percentage points for that. But although all long-term forecasting is intrinsically hazardous, it seems virtually certain that there will be a shortfall, and that taxes will be raised to plug some of the gap. And so, at the end of this thought experiment, our starting conviction is only reinforced: President Bush's tax cuts are shortsighted and reckless.
Unfortunately, Mr. Bush shows no signs of backing off. Having cut taxes three times already, he still proposes new tax shelters for retirement saving and health spending accounts. And he still seems set to sign a monstrous corporate tax bill that's stuffed with giveaways for everyone from Oldsmobile dealers to manufacturers of bows and arrows. The most charitable construction of Mr. Bush's motives is that he believes the future is unknowable, and something may come up; meantime, he's determined to cut taxes on the theory that they sap the economy's energy. But leaders are supposed to think responsibly about the future, not shrug their shoulders. And they should surely understand that taxation is not the only enemy of growth. Deficits can be just as deadly.