The new spending bill is a disaster
By Scott Sumner
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.