Achieving Long-Run Fiscal Sustainability: Audience Q&A, Part 1

April 07, 2013

Bill Emmons, Kevin Kliesen and Julie Stackhouse answer questions from the audience on budget projections and health care costs.


Julie Stackhouse: Yes, right there. Please use your mic.

Q: Good evening. Before you begin with responses, can I request some underlying assumptions on the data? For example, with the considerations about how the economy grows, can we expect our GDP to increase even though—and I don't want to go on and on and ramble—but even if you think about the baby boomers becoming less productive over time and we have a lot of young people and new technologies, would we base our future assumptions on past assumptions? Because the labor force will look different, technology is different. And are we looking from an internal perspective only? We've got the rest of the world coming up in terms of incomes. Are we also building into our future GDP, the expectation that we're going to assume some of that wealth?

William Emmons: That's a great question. All of those projections are based on a forecast of GDP. And so I thought one of the points you're making is that maybe we're being too pessimistic. And I showed you the chart that suggested that the CBO is looking for economic growth to drift down into the low 2 percent range. Maybe it will be higher than that. On the other hand—Kevin sort of alluded to this—there's this flat spot in the baseline of debt to GDP, but that's largely because the CBO has built in a very large spurt of growth starting in 2014. And, in fact, personally speaking only for myself, I think that probably they are assuming too much growth. And so I would suggest that the baseline is based on—I mean, even the flattening out over the next few years is based on the assumption that we will get a burst of growth that would be historically very high. But your point is exactly right that all of these long-term projections could look very different if we had significantly higher growth than we now expect or lower growth than we now expect, absolutely.

Julie Stackhouse: Thank you. Another question over on this side? No? Okay. Yes, back there.

Q: The growth of medical costs in the United States is unsustainable. But we keep reading of countries mostly in Europe which have societies where people are just as healthy, live longer or at least as long as us, and spend a substantially smaller amount of their budget. I don't remember seeing what their comparison to GDP is, but it sounds like if—and there's more than one country, so we're not talking about a single socialized system delivering medicine—it sounds like there's a bunch of different approaches to it. But it sounds like if one of those systems were adopted, we could lop off maybe 20 percent and still have the same results. Nobody seems to be looking at that very seriously.

William Emmons: I'll take it first. Then, Kevin, maybe you'll want to say something, too. You're right, and just very, very roughly, I think the comparison I've seen is that, if you're thinking about France and Canada and Germany, that the amount that their government spends on healthcare is about the same as what our government spends on healthcare. But we have private spending on top of that. So it's maybe not twice as high, but it's significantly higher. You could make the argument, as many people do, about the Canadian healthcare system that they can keep costs down in part because they can depend on the U.S. So there is some amount of overflow. People can come to the U.S. The drug companies, of course, say that if they couldn't charge as high prices in the U.S., they couldn't sell at such low prices in other countries. But yeah, so we're paying for all that.

But the other point I wanted to make, though, is that even though—and I'm the first one to say that we need to keep exploring ways to get healthcare costs under control. I absolutely agree with you on that point. However, those other countries—France, Germany—they're going to hit the wall, too. So even though they do have lower healthcare costs to GDP, they are still rising. They have, in fact, even more rapidly aging populations than we do. There's a demand for more and better healthcare in all the systems, and they have the same basic underlying problems that we do. So I think certainly that argument is not a reason to say we shouldn't try to get healthcare costs under control, but it's a number of things is what I was trying to say. But that's the big one, yeah. Kevin?

Julie Stackhouse: Kevin?

Kevin Kliesen: Well, I would just—I think you made kind of the key points I wanted to make. But, you know, clearly the aging of the population is worldwide. If you look at fertility rates in Europe, they're much lower than we are. Japan, you know, the old joke about Japan, will the last person in Japan please turn off the lights? Their population is actually falling. China has tremendous issues as well. I think one of the saving graces of this country is—you know, just look at a lot of the employees in this bank—this is kind of a magnet for people who are very smart and intelligent and entrepreneurial and want to come here. And we have immigration and we benefit tremendously from it. Now, that's not to minimize some of the problems associated with it. But I think that gives us a lot of advantages that a lot of other countries do not have.

William Emmons: There's one in the back.

Julie Stackhouse: Okay, yeah. First back there, and then we'll go back to the other side.

Q: How do you bring Medicare costs down?

William Emmons: We could...

Q: I've not heard, I've not read—I understand that the costs are doubling over decades. But I've not read any extensive proposals of how that would be stopped. I'm totally confused by...

William Emmons: Yeah. We need a healthcare economist to cover that question in great detail. But I think it's true that neither government nor private healthcare systems have been effective in keeping costs under control. That having been said, the major government healthcare programs are less costly. There's much less administrative cost for Medicare, for example, for the VA healthcare system relative to the private health insurance system. So in terms of Medicare, they've already gone down—for seniors, they are a single payer, so they have low administration costs. But what drives Medicare costs is the increasing number of people receiving the benefit. And even though they do have some ability to restrict the prices, they are a very forceful buyer. And it's not even just the price of a given drug or a given device, but there are new things coming in all the time.

The old joke among economists is that healthcare is the only sector in which technological advance increases cost rather than lowering it. So maybe that way of thinking about it is saying the only way to then lower cost is to limit the amount of services people can have. But I think going back to this 82 percent of people don't want any changes in Medicare certainly don't want benefits limited or saying that you have to qualify for some treatment, or if you are a certain age or a certain health status, you no longer have access to that. Which is what is going on I think in some countries to some extent. Somebody the other day used this as an example. I can't remember, was it a CT scan? In some places, there just aren't very many of those machines available so you wait a long time to get one. Whereas in the United States, maybe we have the ability to produce lots of services. So, you know, it's a dirty word, but rationing is one answer to how those costs are brought under control. Given the point I was making that the big drivers, the aging of the population and the overall expansion of all of the wonderful things that medical science can do for us. And I think also most of us agree that those markets aren't as competitive as we would like to see them. There is a lot of cost shifting going on, whether it's we're paying for drug R&D that the rest of the world benefits from. So I think we are part of the way there with Medicare in terms of making some progress, but the underlying drivers you can't affect.

Kevin Kliesen: To an economist one of the ways you think about this is what causes the demand and supply curve to shift? I think clearly there's such a demand for healthcare, especially when a lot of it we don't really perceive the full costs of our healthcare—and Bill kind of alluded to this earlier—so the demand curve is just continuing to shift out much faster than the supply curve. Typically one of the ways you would do this is, again, you'd get people to understand the true price of their healthcare, maybe raising deductibles and some other things, copayments, things like that.

William Emmons: There I think have been some discussions even of banning Medigap policies. The problem being that if people are completely insensitive to the first dollar of cost, then how they think about a certain treatment is very different than, as Kevin said, with a deductible.

Kevin Kliesen: And on the supply side, you know, Milton Friedman once said we should eliminate licensing for doctors. So let everybody practice. That would increase the supply of doctors.

William Emmons: Or certainly allow other healthcare professionals to do a lot more.

Kevin Kliesen: Yeah, so that would be one of...

Julie Stackhouse: Yeah, and that's a great point. And we'll actually look into this question of whether we could find a healthcare economist to come in. I think another controversial point will be end-of-life care which is a big part of the price tag, too. And so we all want good healthcare, but the point I think you made, Bill, is that we need to understand what that costs and how it's being paid. And then you make the trade-offs, and those are not easy trade-offs.

William Emmons: Not easy.

Julie Stackhouse: Yeah. Okay, I think we had one way in the back here first. Yes?

Q: My question is you had mentioned three big drivers of the government debt, and that was Social Security, Medicare and Medicaid, and the last one was the defense.

Julie Stackhouse: Interest on the debt would be the other one.

William Emmons: The interest was the one that was really rising.

Q: Okay.

William Emmons: Yeah.

Q: But, I mean, of those three big—if you could impact one of them significantly, how much impact would that have on the other two?

William Emmons: That's a great question, and I was kind of alluding to that before. I think even if you could—if you can kind of imagine in your mind, in that chart where I had the four different lines—even if you could flatten out healthcare expenditures, that doesn't solve the problem. Because we are in a position right now of we've got a large debt and we're still running deficits. That would slow down the deficits, it would slow down the accumulation of debt, and just even flattening out that healthcare curve seems daunting. You'd have to make significant changes in other dimensions. Which is why I come back to—and I don't mean this as a political comment, but it just seems unrealistic that this can be attacked without both significant work on the spending and on the revenue side. Kevin and I agree on this one that under the current tax system, if you tried to pay for that spending, it would kill the economy. If you just raised tax rates, income tax rates, to try to keep up with that spending, you would destroy the economy.

Kevin Kliesen: Yeah. And one way to see that is, you know, there are estimates that try to put the future liability in present tense, this unfunded liability. The estimates ran—one estimate I've seen is 80 trillion, which in present-value terms is basically $250,000 per person. It's just incredible. And that's kind of at the low end of some of the estimates I've seen. So we have to tackle the spending side.

William Emmons: Yeah.

Kevin Kliesen: That's where the problem lies is on the spending side.

William Emmons: But I would say along many different points, that's kind of the overall what I wanted to get at is that by changing the nature of the discussion so that we think about there's not a magic bullet, if we could just get this program under control, if we could just raise that tax, it's got to be a whole different approach across virtually all the dimensions. And so I think that, you know, the projection that we're going to be able to keep revenue at the level that it has been historically, I mean, that was the whole point. It is inconceivable that we can get spending down to that level. It is just inconceivable to me.

Kevin Kliesen: Look at the fight over sequestration now. This is a non-discretionary part of the budget. That's not where the problem lies. The problem lies in the entitlement side.

William Emmons: Yeah.

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