Thursday, September 8, 2011

Frederic Bastiat, Call Your Office: What the Committee for a Responsible Federal Budget Would Like to See --and What Can Be Seen: Two Different Things

Under the headline, “What We Hope to See From the Super Committee,” the Committee For a Responsible Federal Budget (CRFB) weighed in yesterday with its recommendations to the Joint Select Committee on Deficit Reduction (Super Committee), which holds its first meeting on Capitol Hill on today.   The CRFB, of course, is perhaps the pre-eminent “deficit hawk” organization in Washington DC, and so its recommendations carry great weight among wonks, pundits, and, inevitably, politicians. 

But what, exactly, is it recommending?  What would CRFB have the Super Committee do?  The September 7 document outlines five sets of recommendations, mostly aimed at reinforcing the determination and credibility of the Super Committee and, by extension, Congress.   But here we will examine just one recommendation: the admonition to “Go Long,” as in, long term.  As the CRFB document puts it, the Super Committee must take entitlement spending head-on, addressing “the long-term drivers”:

Any serious fiscal plan must address the long-term drivers of our growing debt. The Super Committee must enact serious reforms to Social Security, Medicare, Medicaid, and other federal health spending.

In other words, it’s all the major entitlements that must go under the budget knife.   Okay, fair enough: Entitlements account for almost three-fifths of federal spending, and so it makes sense to look into those budget categories for savings.   The CRFB document pushes hard in this direction, advocating an overhaul of spending--including federal health spending--well beyond the familiar ten-year time horizon for federal budgeting.  Indeed, the CRFB looks ahead a full four decades, all the way to 2050: 

Based on our projections, federal health and retirement spending is slated to grow substantially, from below 10 percent of GDP today to 12 percent by 2021, 15 percent by 2035, and 17 percent by 2050.  This is due both to population aging (largely because of the retirement of the baby boom population) and to rapid health care cost growth.

Okay, so major increase in costs is foreseen.  But let’s ask ourselves: How do we really know what healthcare and retirement spending is going to be in 2050?  What do we really know about the middle of the 21st century--that is, what things will be available, and how much they will cost?   To be sure, part of the cost-increase is relatively foreseeable, because of the aging of America; the over-65 population is projected to grow almost three times faster than the overall population, and the percentage of the elderly will increase from about 12 percent of the population today to about 20 percent in 2050.   And old people, to be sure, generally cost more to treat than young people.   Moreover, for the most part, population increases and demographic shifts are relatively easy to project--although some forecasters, such as the notorious Malthusian Paul Ehrlich, author of The Population Bomb, have still managed to be grossly wrong. 

But how much do we know about the future costs of healthcare?  Answer: not much more than we know about what life will be like.   A moment’s reflection tells us that the year 2050 falls into the category of what the great free-market economist Frederic Bastiat called the “unseen,” as opposed to the “seen.”   That is, some things just aren’t knowable in advance.  And to draw upon the wisdom of another free-market economist, Friedrich Hayek, it’s a “fatal conceit”  to think that anyone can plan that far ahead.  Quick questions: What will a computer look like in 40 years?  What will the Internet look like in 40 years?  If we don’t know the answer to those questions, we don’t know what healthcare is going to cost.  To gain perspective, we might think 40 years back to telephones and early computers: How have they changed since the early 70s?  Answer: Thanks to the cost-crashing/ productivity exponentializing power of Moore’s Law, they have changed in every imaginable way, and in ways that nobody back then could have imagined.   So to the extent that computers and the Internet are now thoroughly woven into the fabric of everything we do, it’s a safe bet that computers and the Net--or whatever they will have evolved into four decades hence--will have similarly transformed and retransformed medicine in the decades to come.  And perhaps changes in healthcare will change the length of our productive worklife in some dramatic way as well.   So in other words, we have no idea what federal healthcare and retirement spending is going to be in 40 years. 

Thus a lesson straight from Bastiat and Hayek: Don’t try to predict things that can’t be predicted.  The future--to borrow the distinction made by RAND national security expert Gregory Treverton--is not a puzzle, it is a mystery.  Puzzles, of course, can ultimately be solved by piecing information together--and yet mysteries are, well, mysterious.  In this world, anyone who says he can solve a mystery by examining the pieces of a puzzle is, at best, wrong, and, at worst, dangerous. 

If we continue with our current healthcare strategy--which can be defined as decreasing amounts of new technology, plus increasing amounts of labor and financial inputs--then we will, indeed, get a costly future such as CRFB projects.    Today, for example, nearly six million Americans suffer from Alzheimer’s Disease (AD), and that number is expected to quadruple in the next four decades.  Once again, projections about the future might be suspect, but those concerning the health consequences of an aging population are easy enough to foresee, especially in the absence of any dramatic scientific intervention.  And as of today, we have no proven effective treatment for AD.  Zero.   As a result, AD care is not only labor-intensive--nursing home care for increasing armies of incapacitated dementia victims--but it also meets the definition of “futile care.”   And yet the idea of attacking the true cause of rising AD costs--as opposed to lamentations about those costs in the future--is unmentioned by CRFB.  Indeed, the idea of seeking a cure for AD is essentially ignored by the entire category of Beltway “budget experts.”  The economists and lawyers and talking-point-writers who dominate the DC debate seem oblivious to scientific transformation as an alternative budget strategy.  Three critical words vital to the self-esteem of any bureaucracy are “not invented here.”   That is, if we didn’t think of it, it can’t be worth considering.  

So we might ask: How, under the current medical-technological regime, are we going to save money on AD?   Will we simply reduce the nursing care for dementia victims?   As always, the affluent will be able to buy their way out of personal neglect--even if they have failed to buy their way out of the disease, thus demonstrating an ultimate grim equality of result.   But what about those who depend on Medicare and Medicaid?  What will happen to them?  What are the horror stories to come?   Moreover, how will those people vote?  The brave talk of inside-the-Beltway lobbying groups and legislative bodies doesn’t hold up well against popular passion expressed in the streets and at the ballot box.   That was the story of the federal government’s short-lived catastrophic health insurance program in the 80s,  of Clintoncare in the 90s, and of Obamacare in the last three years.   In other words, Members of Congress who vote for the sort of cuts that CRFB is advocating are likely to be rewarded by opinion-leaders inside the Beltway--and punished by voters outside the Beltway.   That is, elected officials can become un-elected officials and then, as a consolation prize, get a good seat at the Gridiron Dinner. 

Yet there is another path, completely ignored by CRFB, and that is the path of medical progress.  The words “medicine,” “research” and “cures” do not appear at all the in the CRFB document.   And yet it is only through medical progress that genuine medical transformation can occur.   Profound transformation is achieved by visionaries and scientists, not by financiers and bean-counters. 

It’s worked that way in the past.  Let’s take polio as an example.  Back in the early 1950s, economists calculated that the polio epidemic, then raging, would cost the US economy $100 billion a year by the year 2000 (more like $1 trillion in today’s dollars).  Yet instead of accepting the basic premise of that projection--that the polio epidemic would continue forever--we changed the basic premise.  That is, we developed the polio vaccine.   And so, instead, our expenses for polio are essentially zero.  And what’s the smart way to think about that kind of budgeting?   Going back to that projection from the 1950s, deficit hawks might have said that $100 billion a year is too much money.  So should they have said $90 billion?  Or, even hawkier, $50 billion?  The fact is, if polio were still engulfing us today, such reductions would be politically disastrous; voters would show their fury at the ballot box.  

Meanwhile, Alzheimer’s today is costing the US economy $172 billion a year, according to the Alzheimer’s Association.    And the cumulative cost is headed up to $20 trillion by 2050.   Deficit hawks might say those dollar figures should be reduced by 10, 20, maybe even 50 percent or more; that’s what deficit hawks do.      But there’s still that nagging issue of “how?”  As we have seen, AD care is expensive; indeed, labor-intensive healthcare runs into the iron logic of Baumol’s Law--if it’s labor-intensive, it will be expensive.   In other words, it’s one thing to declare that eldercare should be X-percent cheaper in the future, it’s another thing to achieve those savings.    As the news from the UK reminds us, the obvious solution is rationing--rationing that costs lives.   And from rationing, it’s not hard to get to even more draconian cost-saving solutions.   As always, it’s easier to envision these solutions inside a marble palace of planning, as opposed to at an actual patient’s  bedside.

Interestingly, CRFB seems to have grappled with this issue--the issue that its proffered solution is unpopular with the American people; the polls, after all, show that by 3:1 or 4:1 margins, people don’t want to see cuts in Medicare.   So perhaps in anticipation of a likely political backlash, CRFB is telling the Super Committee that it’s okay to “backload” the cuts--that is, have them come beyond the ten-year time horizon.   Super Committee members are told, in other words, that it’s okay to make negligible cuts in the near term, as long as big cuts are made in the long term:  

To reassure markets and put our budget on a sustainable path over the long-term, the Super Committee must therefore address the growth of the nation's largest entitlement programs, and give priority to those reforms with the potential to slow long-term growth paths (even if they do not have significant scoreable savings this decade). Reforms to Social Security, Medicare, and Medicaid are central to improving the long-term imbalances. [underlining in original]

Okay, so in other words, the CRFB is telling the Super Committee that it’s all right to make small cuts in the near term, over the next decade, as long as the big cuts come later.   But we might ask: Isn’t that the essence of kicking the can down the road--that is, telling Super Committee members, and Congress as a whole, that the big cuts need come only many elections hence, in 2021 or thereafter?   And what economic problem does that solve?  Aren’t we in a crisis now? 

What could be the reason for this budget-fudging?   One possibility is that CRFB accepts the Keynesian argument that immediate cuts in spending--and thus in consumer demand--might damage the economy.  Another possibility is that entitlement cuts in the near term are just too painful politically; that is, if such cuts are on the menu where the voters can see them, the whole project collapses as the politicians flee.   

Yet we might ask: If the work of CRFB is not about cuts anytime soon, then what is it about, exactly?   A third possible explanation is that the CRFB simply wants a deal.  That is to say, CRFB wants something that it can call a success.  Or, to be even more cynical about it, with apologies to the late Sen. George Aiken, it wants something that can be dubbed a “victory,” no matter how transparently risible that “victory” might be.   That is, something that proves that the American Establishment can still do something--anything.   Establishmentarians always like to emphasize their credibility, their seeming competency.  And the CRFB is the epitome of an operationally conservative establishment--not ideologically right-wing, just eager to tamp things back down to something that looks like normalcy.  

So back to CRFB’s  recommendations to the Super Committee.   And if those numbers are built on bad assumptions?  Well, that’s a problem to addressed at some later time.  The important thing, it seems, is that we have a deal in our time.  

The problem for the rest of us, though, is that the problems we face are not normal--and neither are the solutions.  Science, and scientific progress, are inherently disruptive, and if the political Establishment can’t handle that truth, well then, we need a better Establishment.  Indeed, for reasons that C. P. Snow outlined a half-century ago, contemporary political and cultural can barely handle science and what it brings.  And so the establishment just pretends that science doesn’t exist.  But as Galileo said under his breath at the Inquisition, eppur si muove.   That is, just because the reigning orthodoxy says that something isn’t happening, that doesn’t mean it isn’t happening.   As they say, if we don’t deal in reality, other people will.   Reality is a stubborn thing.  Indeed, the only way that the Establishment can possibly makes it straight-line projections  work is by squashing science--and we know how that ends.   

Then and now, politics, and the desire for orthodoxy, has trumped looming reality.   The obvious reality is that if we don’t do something radical about AD and other costly diseases, none of these budget deals are going to be work out as the American people might hope.  Either we will vastly more than the “deficit hawks” wish, or we will move toward rationing--or worse.

Today we see huge edifices of political thought being based on projections about the budget deficit in 2021, 2050, or even later.   There’s nothing wrong with predicting the future--so long as there’s an adequate amount of humility in the predictions.  But the bold predictions of CRFB as to what will happen in the middle of this century are based on a kind of know-nothing hubris.  The hubris that pretends to knowledge about what is unseen and mysterious.   And that is, indeed, a fatal conceit.  


  1. SS is not an entitlement Jim.
    I paid into it!

    If the Hill People didn't have 'sticky fingers' over the years, then Perry wouldn't be able to call it a Ponzi scheme, which it is!

    You ask, "Will we simply reduce the nursing care for dementia victims?"
    YES! Feed them. Give them blood thinners so they don't stroke. But don't give them medicine for pneumonia and the like.
    My family has AD in its genes. And my health care proxy says just what I wrote above
    If I don't know what planet I'm on, then it's time for me to "move-on" "naturally".
    My 90 year old AD aunt became a cash cow for her health care providers. As her Administrator, they wouldn't follow my wishes. It would have taken an army of lawyers and a ton of money to make them stop with the antibiotics. In my estimate, she lived about 4 years longer.

    You are right Jim, the CRFB predictions are from La-La land. Maybe they have AD and don't know it!

  2. You add 2 and 2 but your result is Z. You take Bastiat and you add Hayek but your result is not even in the ball park.

    Bastiat was all about opportunity cost and Hayek was all about decentralized knowledge.

    What is opportunity cost? It's the realization that the money you spend on one thing you value cannot be spent on all the other things you value. That realization forces consumers to prioritize how they spend their money. Every single consumer considering the opportunity costs of their spending decisions leads to the best use of limited private resources.

    Hayek's decentralized knowledge is simply that we are all blind men each feeling a different part of the elephant. We all only have partial knowledge. The blind men wouldn't have come to the correct conclusion if they had averaged their perspectives. To come to the correct conclusion they would have had to add their knowledge together.

    To guarantee the best possible use of public funds we should allow each and every taxpayer to directly allocate their individual taxes among the various government organizations. This would force them to consider the opportunity costs of their tax allocation decisions.

    Voters want to have their cake and eat it too...and congress is only too happy to oblige. The solution is to outsource these hard decisions to taxpayers. Millions and millions of taxpayers making hard decisions with their individual taxes will lead to the most efficient allocation of public funds.