Let’s start with the minor stuff:
1. There’s lots of pork barrel spending for areas with influential senators, such as Kentucky and Alabama.
2. Congress agreed to waste an extra $1.4 billion on a border wall in exchange for an extra $27 billion in domestic spending.
3. There’s lots more spending on wasteful military programs such as the F-35 fighter jet.
4. More corporate welfare, including a seven-year extension of the Ex-Im Bank.
5. The smoking age rises from 18 to 21 (Congress should instead cut the drinking age from 21 to 18, as in normal countries.)
This is my view:
“These spending bills are a fiscal dumpster fire,” said Sen. Mike Lee, R-Utah. “This is embarrassing.”
And yet while all of these changes are unfortunate, they don’t even come close to constituting a “disaster”. So why do I use such hyperbolic language?
It turns out that the bill contains one specific provision that truly is a disaster. The Obamacare bill was funded with a set of new taxes. In 2017, Congress refused to repeal Obamacare, something the GOP had promised to do if they won the election. The new plan is to keep all the spending in Obamacare, and repeal the taxes that would pay for it. Over the next decade these changes will add another $400 billion to the already historically unprecedented budget deficit. (Unprecedented for a period of peace and prosperity.)
While a bigger budget deficit is a serious mistake, it’s hardly a disaster. So once again, why do I use such hyperbolic language?
The disaster is the repeal of the so-called “Cadillac tax” on expensive health care plans. To understand why this is such a tragic mistake, you first need to understand the nature of American health care. Almost half of the US healthcare system is directly financed via government programs such as Medicare, Medicaid and the Veteran’s Administration. A large share of private sector health care provision is funded by private insurance. Because this insurance is often provided by employers, it is tax deductible.
This means that the government effectively picks up about 40% of the cost of health care provided by the private sector. Needless to say, this provides a powerful incentive for excessive use of health care, and helps to explain why American health care is far more expensive than in other countries. Even worse, this tax provision encourages people to pay for health care via the insurance system, rather than out of pocket. Even my disposable contact lens are purchased this way, which means American taxpayers pick up roughly 40% of the cost of this frivolous luxury.
Thus in two distinct ways the government subsidy of private health insurance vastly inflates spending on health care, wasting hundreds of billions of dollars. The primary goal of the Cadillac tax was not to fund Obamacare; rather it was to gradually scale back this subsidy. As more and more people were inflated into insurance plans subject to the Cadillac tax, the subsidy for health care would have gradually declined over time. Eventually, almost everyone would pay the full cost of health insurance, at the margin.
Repealing this tax removes the best chance we had to reform America’s bloated health care system. Inflated spending on health care and education is one reason why real wages have risen more slowly in the period after 1973. Indeed I’d say it is the primary reason why the living standards of blue-collar workers have not risen as fast as expected. And yet, as is so often the case, the media is paying very little attention to this important issue.
There is also very little discussion of the way our budget deficit inflates the trade deficit. Instead, reporters discuss Chinese promises to buy more US goods as if they would improve our trade balance. The press also ignored the fact that monetary policy was far too tight during the fall of 2008.
Politicians often view the press as the enemy. In reality, politicians benefit greatly from the media’s failure to inform Americans as to what the government is actually doing. When I speak to ordinary Americans, I find they don’t even know that the budget deficit is exploding.
READER COMMENTS
Alan Goldhammer
Dec 24 2019 at 3:25pm
Yet all the surveys show that attempts to fix the tax exempt status of private health insurance are unpopular as it would undoubtedly lead to corporations getting out of the healthcare provision aspect of their business. As to most Americans not knowing what the government is doing, this should be a big surprise.
Scott Sumner
Dec 24 2019 at 5:03pm
Polling data on complex issues is not reliable.
MarkW
Dec 26 2019 at 2:35pm
Polling data on complex issues is not reliable.
Sure. But are any politicians worried about losing an election over voting for any of this?
Lorenzo from Oz
Dec 24 2019 at 6:00pm
A major reason why the Diversity-Inclusion-Equity social justice faith system is sweeping institutions and bureaucracies is that it is easier. E.g. selecting for competence is (often) hard, ticking diversity boxes is easier.
I suspect PC/woke/Social Justice culture has made longstanding media inadequacies even worse, because pushing the outrage buttons is not only so much easier than getting across and explaining complex issues, it provides all sorts of moral highs as well.
That said, the essay in Politico that David Henderson cites is an example of how serious journalism can still be done.
Also, Merry Christmas.
Lorenzo from Oz
Dec 24 2019 at 6:12pm
On the subject of the Diversity-Inclusion-Equity social justice faith system being easier, contemplate this little chestnut.
“If you conclude that outcome differences by demographic subgroup is anything other than a broken system that is, by definition, bigotry.”
Mark Z
Dec 24 2019 at 9:51pm
The obvious question is: why is imposing a tax to counteract a subsidy the best chance at reforming healthcare? Wouldn’t the easiest way be to just… get rid of the subsidy? I know one may answer that, unfortunately, the tax exemption for employer-provided insurance is very popular and basically a political third rail. The best one can hope to do is surreptitiously undercut the exemption via a tax so voters don’t notice. However, the elimination of Cadillac tax by our elected officials (and the repeated delay of its implementation before that) suggests that no, the exemption can’t be eliminated indirectly without voters noticing and stopping it. Maybe it’s an issue that just has to be confronted head on, and the subsidy itself has to be directly challenged.
Another thing: to the extent that the revenue from the Cadillac tax was used to fund increases in other healthcare subsidies, that undermines its net negative effect on health expenditures. Instead, the revenue should’ve just gone into general revenue, which might have had the added advantage of making it less of a political target.
Scott Sumner
Dec 25 2019 at 12:31am
I don’t believe the repeal of the Cadillac tax has led to any reduction in subsidies.
Mike Sandifer
Dec 25 2019 at 8:52am
Unless I’m mistaken, the Cadillac tax is dead, because even a small number of union votes in a few swing states could be critical in the next election. Would this tax be worth keeping if it helped Trump get reelected? Could Democrats, who instituted the tax originally, really afford to oppose eliminating it?
Tom West
Dec 26 2019 at 3:50pm
Agreed. I feel it’s like opposing the mortgage interest deduction. There’s simply too much political capital to be made by attacking anyone willing to do the sensible thing for it to have any chance of success.
TMC
Dec 25 2019 at 12:28pm
The border wall is the most efficient way to handle our illegal immigrant problem. Just the thing I’d like to see the government do more of, is to pick an efficient method of handling our problems. If your are worried about the $1.4 billion, start here: https://www.amgreatness.com/2019/12/23/giuliani-says-saint-marie-yovanovitch-quashed-ukraine-probe-into-missing-5-3-billion-in-foreign-aid/
E. Harding
Dec 25 2019 at 12:36pm
Not the case; the worst aspect of the bill are the sanctions on Syria, Russia, and Iran.
Only six representatives voted against Cadillac Tax repeal: three conservative Republicans and three moderate Democrats.
http://clerk.house.gov/evs/2019/roll493.xml
Does it? American healthcare is not substantially more expensive than what one would predict by looking at its GDP per capita and actual individual consumption levels.
https://randomcriticalanalysis.com/2017/07/27/health-care-prices-do-not-play-the-role-most-believe/
Scott Sumner
Dec 26 2019 at 11:59pm
I’ve seen that argument on the cost of US healthcare, but I don’t buy it.
Random Critical Analysis
Dec 27 2019 at 2:16pm
Why not? What do you think explains the rising expenditures in other countries? What would it take to convince you?
~ RCA
Comments are closed.