Simon Wren Lewis illustrates the long-run government budget constraint with this tale:
There are many reasons why, outside of a recession, deficits that, if sustained, would steadily increase the debt to GDP ratio may be bad for the economy, but let me give the most obvious here. For a given level of government spending, interest on debt has to come out of taxes. The higher the debt, the higher the taxes. That is a problem because high taxes discourage people from working, and it is also unfair from an intergenerational point of view. This last point is obvious if you think about it. The current generation could abolish taxes and pay for all spending, including any interest on debt, by borrowing more. That cannot go on forever, so at some point taxes have to rise again. A whole generation has avoided paying taxes, but at the cost of future generations paying even more. As a result, unless there is a very good reason like a recession, a responsible government will not plan to sustain a deficit over time that raises the debt to GDP ratio. The problem though is that it is very tempting for a government not to be responsible. The current US government, which is essentially a plutocracy, wants above all else to cut taxes for the very wealthy, and if they do it without at the same time raising taxes on other people but instead by running a deficit they think they can get away with it. Democrats have every reason to say that is irresponsible, although of course the main thing they should focus on is that the last people who need a tax cut are the very rich.
In my discussion of a paper by Jeffrey Miron, I exemplified what he is saying here with the Reagan tax cuts for the rich and defense spending build-up, which may be a description to what Trump is doing now. As Simon admitted after this comment, borrowing to fund infrastructure investment is different:
But surely spending from borrowing and at least some taxation wouldn’t necessarily have the same effect. An equilibrium could at least be sought at higher levels of borrowing and higher levels of economic activity. Particularly with spending on education of course (where in any case the intergenerational fairness argument is weaker).
I added a comment that the 1983 prefunding of Social Security benefits is another form of intergenerational equity where we build-up a trust fund to pay for our future retirement benefits – assuming of course that the Republicans do not squander it on more tax cuts for the rich. But let me tackle the issue of health benefits since my noting of the Baumol Cost Disease drew this appropriate response from Barkley:
The Baumol cost disease hits all labor-intensive services, including large amounts of government activities that are not health-related. But somehow the US has had this especially rapid rate of med cost rise not experienced in any other nation, sort of like our exceptionalism on mass school shootings. This is way beyond Bauumol cost disease.
I agree and more on this after noting Barkley’s other comment:
Miron is right that the main upward driver on the spending side is medical care, but somehow Miron does not seem to offer any hope that we can restrain its cost growth to the inflstion rate or even less.
We can and should reign in medical costs. As I see it – there are two issues that both impact how Federal health care payments evolve over time. One is the fairness issue sometimes known as universal health care. If we as a nation do the right thing and make sure health care is both accessible and affordable to all, it is likely that government funding of health care will take a greater portion of total health care spending. I guess we could leave this to the states like Paul Ryan wants to but then states tend to use more regressive forms of taxation. I would prefer a greater role played by funding via a progressive income tax system. Barkley’s point is that we pay a lot more per capita than other developing nations. This chart may not be the “chart of the century” but it is “excellent” as it traces total health care spending as a share of GDP since 1980 for both the U.S. and other nations. Whereas our ratio jumped from 8% in 1980 to near 17% now, other nations have only seen modest increases in their health care spending relative to GDP. So maybe the Baumol Cost Disease is a small part of the story but rising market power for health care providers is a serious problem for the U.S. but not other nations. Timothy Lee is right:
Most of federal and state budgets are spent on services — law enforcement, education, health care, the courts, and so forth — that are subject to Baumol’s cost disease. Government spending on these categories has grown inexorably in recent decades, and many conservatives see this as a sign that there’s something badly wrong with how the government provides these services. But Baumol’s work suggests another explanation: It was simply inevitable that these services would get more expensive over time, at least relative to private sector manufactured goods like televisions and cars. The rising cost of services is an unavoidable side effect of rising affluence generally. There’s probably no way to maintain our current standard of living while cutting the cost of these services back to the levels of the 1950s.
Of course this also means governments need to crack down on market power in these sectors. The relative price of a string quartet’s performance may have to rise over time but there is no reason to pay the musicians twice the market salary. Maybe doctors should be properly compensated even as their productivity does not rise with manufacturing sectors but we need to find a way to hire U.S. doctors at salaries closer to what doctors receive in the rest of the developed world. But let me finish with what really galls me about Jeffrey Miron’s paper:
Given those projected values for real GDP, I construct projections for revenue and discretionary spending by assuming they always equal 17.3 percent and 8.2 percent of real GDP, respectively. The values equal the average revenue-over-GDP and discretionary-spending-over-GDP ratios, respectively, between 1975 and 2014. …Figure 20 suggests that even with tax revenue substantially above its postwar average, and assuming no effect on growth, fiscal imbalance would still be large. If higher taxes have even a modest negative impact on growth, tax increases have no capacity for restoring fiscal balance.
To say we cannot raise the ratio of taxes to GDP much above 17.3% is just absurd. We can if we have the political will. But Republicans either argue this is not fair or there is some Art Laffer magic wand. As an economist, I reject the latter. But on the politics, let’s think of a young man who just got married and is expecting a family of children. Inevitably some parents will face rising health care costs unless they are lucky. I would hope this father would not put going out on the town and expensive vacations ahead of the health care needs of his family. For a nation – rising health care costs over time need to be funded and most hopefully by an equitable Federal government even if the very rich get to take less vacations in the Hampton or fewer shopping sprees on Rodeo Drive
“we need to find a way to hire U.S. doctors at salaries closer to what doctors receive in the rest of the developed world.”
Typical American med school grad graduates with over $200K debt. They have to pay off those loans, with interest, somehow. If you want to change doctor salaries, you’ll need to address the debt problem.
There’s also the market problem. While med school class sizes have increased and new med schools have opened, the number of residency slots hasn’t increased. You can’t practice without at least a year of internship.
You are talking in the aggregate. The Fee for services model is definitely a problem. Doctors perform services of which some have a better benefit of outcome than others. Some services are better than others, some are not needed, and some have lower success rate or quality of outcome. Medicare’s Dr. Berwick cited that 30% of all Medicare dollars expended are wasted when looking at the services for fees business model.
This is almost akin to manufacturing. You have overhead in your buildings. There is materials in your hospital supplies. There is labor in the doctors, nurses, and techs. However, solving the Labor portion in its fees for services is only a partial solution.
Solve the fee for services, hospital supply/pharma, and the duplication of need for multiple MRI machine needs, massive building structures, etc. and much of this issue goes away. Healthcare is not just Labor and is a combination of components.
“Henry Azar took Eli Lilly’s Humalog diabetes drug and increased the price of it from $2,657.88 per year to $9,172.80 per year. After acquiring Vimovo, Horizon Pharma increased the price of it from $138 to $2,979 per 60-pill bottle. This is not the end of the story with Horizon. They will sell to customers at a much lower price and bill insurance at the higher price. Turing Pharmaceuticals Martin Shkreli bought the rights to the 62 year old drug Daraprim and immediately increased the price for it from $13.50 to $750 a pill. The same as other drugs, EpiPens will also rise and fall in price at the discretion of its manufacturer with little regard for actual cost.”
There is no improvement of the drug or scarcity. It is profit taking as they are the only source with no generics soon to be had.
JAMA pointed much of this out which I also pointed out.
“That is a problem because high taxes discourage people from working,..”
WTF? This is not event remotely true and is empirically negated…. domestically and globally.
The premise Is false from the get-go.
Are you rejecting Arrow’s 1963 data and economic analysis, because it sure seems like it. If not, please reconcile.
“If you want to change doctor salaries, you’ll need to address the debt problem.”
That might be, but there is just as much as a need to address all student debt problems. I’m not staying up late at night worrying about a doctor with a 200,000 student loan while not paying attention to a “regular” person with a $50,000 student loan.
Debt to income is a huge factor in all finance.
“With a base pay offer of $189,000 a year, on average, family practitioners, pediatricians, and psychiatrists are offered the lowest pay of all physicians, according to the medical search and consulting firm Merritt Hawkins & Associates’ 2012 Review of Physician Recruiting Incentives.”
And that is six years ago.
Let’s take that $189,000 and deduct half for taxes. They got $90,000 a year left. Live on $60k for seven years and they have no student loans left(or close to it).
Let me know of any other grads that can come close to that.
I wasn’t posting to address what keeps you up at night. I was posting to help explain why physicians make so much. Could they live like a poly sci grad and pay off their debts sooner? Sure. But why should they, if they can demand higher salaries? I’m not sure what point your glib answer was trying to make.
Menzie Chinn features the Goldman Sachs update of the primary surplus (yuuuge deficit) in light of Trump’s fiscal fiasco. Of course Menzie’s right wing troll known as Peak Trader babbles on in the comment section in a manner that makes Cochrane look sane.
“Are you rejecting Arrow’s 1963 data and economic analysis, because it sure seems like it. If not, please reconcile.”
Not all. I see reliance on free markets is part of the problem, which in a way is what Timothy Lee is saying. We both reject the Mark Perry theory as to why health care costs have risen as has Barkley. Government intervention to contain costs is part of the solution and not the cause of the problem.
Joel – other nations manage to train highly qualified doctors without having them go deep in depth. The facts you allude are unique to the US which is why we need to learn from the rest of the world – as opposed to lecturing them.
” why should they, if they can demand higher salaries?”
They can demand high salaries as the AMA acts like a cartel. Dean Baker gets this as does Milton Friedman. Maybe one day you too will see the light.
Hey maybe we economists should form a cartel and jack up our salaries!
My glib answer is that medical school debts to a doctor are not high when taking into account their earnings.
I know 10 to 20 doctors, young and old. I know none who have financial problems due to their student debts. I know a whole lot of college grads, many who have financial problems relating to their student debts.
In any case student loan debt is an issue. Usually, the higher the degree, the higher the interest rate charged for it. Those with lesser desirable degrees in fields given lesser salary struggle with the loan payment. Then there are the Navients of the world who are thieves.
Thanks for clarifying your take (vis-a-viz the 1963 Arrow economics of health care)
Regards the AMA it’s more than a cartel….it’s a guild, no different than those of the 14th century. Today we would call it a Medical Doctor’s union. .
Also, I personally know, have often visited, and have discussed relative incomes, net of taxes with two European doctors — both specialists. They are both highly informed of general medical doctor’s incomes. Both are also intimately familiar with U.S. medical doctors incomes in their own specialties.
In Europe medical doctors per capita (thus serving the entire poputions of the national health care patients) are fewer than in the U.S. For the national health care system their fees are limited to specific procedures by the national systems.. The tradeoff is between serving the total population and having sufficient incentives for medical doctors to practice in Europe on a relative income basis. In that sense it is a combination of supply / demand based incomes.
To compensate then there are fewer doctors per capita to increase the incomes of medical doctors relative to having more available rather than less. In order to insure more than ample medical doctors are available to serve the population’s needs, they have more nurses per doctor than in the U.S.
What the European doctors tell me is that nurses and well rained technicians provide the care and prescriptions that don’t require a regular meeting or a doctor’s time, thus freeing them to do what doctors do and are trained to do, and thus serving the demand without issue.
If a patient wants more service they can purchase supplemental private insurance, and see doctors on demand and think they’re being better cared for — when in fact they are just getting more of a doctors time. Those that purchase the supplemental insurance are some of the upper 10% of incomes… increasing with increasing income levels and dropping as the go lower.
Also medical school training is highly subsidized by the health care system so the population is paying for a significant proportion of medical doctors costs of being in that profession…
This is a form of amortizing medical care training costs over the population .. e.g. training costs x number of doctors needed = total cost of medical training divided by the total population x proportion of training costs paid by them = cost of medical training per capita . The subsidy proportion is defined by the national heatlh care system to maintain sufficient medical doctors of the variety required to meet demand.
One of the benefits of this is that more middle income families can afford to send their children to medical school which has the advantage of increasing families’ social status and the major benefit of reducing income inequality (sort of like increasing upward mobility)..
In the non-Arrow paradigm free-for-all laissez faire medical professional system in the U.S. all of this is controlled by the doctor’s guild (AMA)… which not surprisingly insures doctors are paid far more than their value to societies health care. .
And lest I forget, European medical doctors are paid at the relatively higher income levels and enjoy the same status, high respect, and benefits of the relatively higher incomes. They just can’t afford huge mansions on large estates, multiple vacation homes, and spend like there’s no tomorrow. Ditto for Dentists, btw.
On Dental care — my friend’s wife is having most of her teeth replaced by implants. My wife has had only less than 10 teeth replaced by implants. Both have had to have bone grafts (adds to the cost). My friends wife (Heidi) is paying a total outlay of $~ 7k – $10k (including insurance premiums) while my wife has paid ~ $50k for far fewer implants. Both see very highly qualified specialists.
Go figure. None of my wife’s costs are covered by insurance or formerly by a Group plan that paid 15% max overall When we were no longer eligible for the group plan any reasonable private insurance alternative didn’t pay for implants at all.
Run, I’d check that interest rate thing.
My best friend’s son refied at 4% for his medical school loans.
Since I’ve been a professor at a medical school for over 30 years, I’ve known dozens of doctors and hundreds of med students. I’ve known none who have run into debt problems, because in America, doctors can command much higher incomes than in other countries, and so can pay off their debts.
I think you’ve lost the narrative here. Why do doctors get higher pay here? Because their debt upon graduation is way higher than doctors in other countries.
As for the AMA cartel argument as I posted upthread, the number of US trained med school grads has increased, and we continue to admit foreign-trained grads, but the number of residency slots hasn’t increased. Since residency training is sine qua non to medical practice in this country, the marketplace imperative of supply and demand is still on the demand side. The AMA doesn’t control residency capitation.
And to piggyback on LT’s excellent post, in America, physicians are doing what less expensive health professionals could do. Last December, I found my way to a urology clinic where a resident installed a Foley catheter. This is a procedure that a nurse practitioner could do. Yes, the resident got training, but my insurance was billed for a physician’s time.
We need to make better use of PAs and nurse practitioners.
So LT had an excellent adventure?
Perhaps I have lost the narrative as you say. But I see absolutely no relation of education costs to higher doctor salaries. Of course there is a correlation, but the causation lies in the other areas you and Run mention.
You seem to think the AMA is a benign organization instead of powerful guild.
States are the only bodies that can license MDs, which is political process that the AMA lobby controls in each State.
The AIA is the same, btw.
I see nothing in your “up thread” comments that address the AMA’s influence.
And btw, it’s really easy to reduce the Med School costs debt on graduates — provide State and/or Federal subsidies. If you like laissez-faire, then the medical practices are a pristine example.
Oh, and before I forget, the oft used propaganda that med docs have to charge so much because medical malpractice insurance costs a fortune is just that: Propaganda.
Several studies have shown that total outlays for medical malpractice awards, both settled out of court and those settled by litigation including attorney’s costs are ~ 2% of composite medical doctors costs.
I can’t cite the studies anymore (I didn’t keep references to them).
And besides, many medical malpractice awards against physicians are indeed warranted… because the State Licensing Boards don’t get rid of them first. I don’t know how “many” many is… that data is not published that I can find.
I personally know of one in CA where the Licensing Board fined the physician a nominal amount and withdrew his license for one year and he want right on practicing after that until the civil suit (lasting 5 years)found him guilty of serious malpractice and the court banned him for life from practicing in CA. So he moved to Reno, NV, was licensed, and started practicing again.
Great system, huh?
Re Medical cost:
perhaps “An American Sickness” by Elisabeth Rosenthal would shed some light on the problem. It looks to me like “medicine” is suffering from the same disease that “banking” and politics and used car sales are suffering from. Well, there is a limit to the damage the last listed can cause, but the it’s same triumph of greed over decency. In any case “high medical school costs” don’t seem to be causing doctors much loss of sleep.
And using “generational equity” in proximity to “Social Security” strikes me as stupid beyond comprehension. Do “the young” not know they will become “the old” in their turn. As retirement expenses are not expected to go down in the future, it may be assumed that each generation will get (when they are old) at least what they paid for (when they were young).
Now, if “generational equity” was meant to apply only to the national debt, I wish the author had made that clear (given that “generational equity” is the cry of those who want to kill social Security), as well as make clear that Social Security is not a driver of the national debt (the workers pay, in advance, for their own benefits. they get a “time value of money” on their “investment,” which is roughly the same from generation to generation, despite the clever lies told by the enemies of Social Security.
Now, I don’t know if “the debt” is generationally unfair (absent implications about SS), but it seems to me a “mathematical” argument is unlikely to get to an important understanding:
do living standards go up or down over time? does the next generation have the same disadvantages as those generations who suffered the draft, or the great recession, or the cost of bread, or the change in interest rates… ?
I don’t know, but in the absence of compelling testimony that we are meaningfully worse off because of the house our parents bought “on time” I’d be a little reluctant to join the hysteria about “debt.”
This is not to say I think the current level and kinds of government spending are wise.