Partisan Differences on “Health Inefficiency” As Important as Tax Chasm

There are a variety of reasons I’m a pessimist about any sort of long-term bipartisan agreement on fiscal policy. The most obvious, of course, is the chasm between left and right about the significance of the “debt crisis” vis a vis the dictates of economic recovery, itself a major component in any movement towards lower federal budget deficits. At the Financial Times, Martin Wolf offers one of the clearest non-Krugman explanations of the liberal point of view and the differences between the two major parties:

If one judged by the debate in Washington, one would conclude that the federal government is close to bankruptcy. This view is false. Yes, the US does confront fiscal challenges in the long term. But these are largely caused by the soaring costs of its inefficient healthcare. Yes, the US is engaged in a fierce debate on fiscal policy. But this is due to philosophical disputes over the role of the state. Yes, the US has been running large fiscal deficits in the short run. But these are a result of the financial crisis.

Wolf runs the numbers in some detail, concluding that a modest deficit reduction package along with a modestly robust recovery could stabilize the medium-term debt-to-GDP ratio at around 73 percent.

Would this be unbearable? No. At current real interest rates, the cost would be zero. Even if real rates of interest were to rise to, say, 3 per cent, the fiscal cost, in real terms, would be a mere 2 per cent of GDP. That is perfectly manageable.

Keeping the long-term picture “manageable” will require stronger medicine, as most progressives have long conceded even as they resist a short-term deficit-mania that could defeat itself by stalling the recovery. But the problem, of course, is a vast gap between liberal and conservative prescriptions for dealing with tax rates–which Wolf thinks could become significantly more progressive in a time of extreme concentration of wealth at the top–but also for reducing “health inefficiency.”

It’s this second problem that needs more attention, because there is no obvious compromise available. Republicans have become inflexibly wedded to the notion that a massive retraction of public health insurance programs–notably abandonment of Obamacare, abandonment of Medicaid as an entitlement–and an equally massive expansion of “market mechanisms” both within (e.g, converting Medicare to a “premium support” system of private insurance) and beyond (e.g., interstate insurance sales that gut state regulation, and various disincentives to the utilization of health services) the public programs, is essential. Democrats are not as unified, but tend to see aggressive use of the public sector’s leverage in the health care system to improve medical practices, wring out unnecessary administrative costs, and flush out hidden cross-subsidies, is the key.

This is a bigger gap than any that currently exists between the two parties on tax policy, leading in two opposite directions. You can’t really “split the difference” between them as you can with tax rates. Perhaps, if Republicans fail to find ways to stop implementation of Obamacare, their health care policy prescriptions will eventually appear to be so out of touch that they will lose support even within the GOP. But I wouldn’t bet on it.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.