Eat the Rich

Megan McArdle:

As the angry debate over Ryan's budget plan wears on, one suggestion I'm seeing over and over is that we should just raise personal and corporate income tax rates back to where they were in the 1950s, when marginal tax rates were 50% on corporate income and up to 90% on personal income.

Really? Who's saying that? Anybody of any significance?

Bold Thinking on Climate Change

Medicare and the federal deficit are long-term problems. Global warming is also a long-term problem. Paul Ryan has been widely hailed as courageous for proposing a 100% conservative solution to the former, so Matt Yglesias wants some props for proposing a 100% liberal solution to the latter:

Yes this is a “politically unrealistic” agenda, but why is that different from the widely praised “boldness” and “bravery” and “adult” nature of various deficit hawk concepts? Can’t we get a commission? A grant from Pete Peterson? Something? It seems to me that a politician who wrote down a Ryan-style “Climate Roadmap” would find him or herself dismissed as a leftwing crackpot pushing wishful thinking rather than a bold thinker. It’s infuriating.

Yes. Yes it is.

The Algebra II Blues

This story has been tickling the back of my mind ever since I first saw it, but I haven't blogged it yet. So here it is. I knew that many school districts have started requiring kids to pass algebra in order to get a diploma, and I've always had mixed feelings about this. But a few days ago the Washington Post informed me that things have gone far beyond that:

Of all of the classes offered in high school, Algebra II is the leading predictor of college and work success, according to research that has launched a growing national movement to require it of graduates.

In recent years, 20 states and the District have moved to raise graduation requirements to include Algebra II, and its complexities are being demanded of more and more students.

....One of the key studies supporting the Algebra II focus was conducted by Anthony Carnevale and Alice Desrochers, then both at the Educational Testing Service. They used a data set that followed a group of students from 1988 to 2000, from eighth grade to a time when most were working. The study showed that of those who held top-tier jobs, 84 percent had taken Algebra II or a higher class as their last high school math course. Only 50 percent of employees in the bottom tier had taken Algebra II.

....But not everyone is convinced that Algebra II is the answer. Among the skeptics is Carnevale, one of the researchers who reported the link between Algebra II and good jobs. He warns against thinking of Algebra II as a cause of students getting good jobs merely because it is correlated with success. “The causal relationship is very, very weak,” he said. “Most people don’t use Algebra II in college, let alone in real life. The state governments need to be careful with this.”

This is one of the things that makes me so dubious of the ed reform community. Algebra II! As a minimum requirement to hold a high school diploma! We're literally saying that if you can't factor polynomials, manipulate complex numbers, do matrix arithmetic, and understand basic trig, then you can't get a high school diploma? Really?

This effort is apparently being spearheaded by Achieve, "a group organized by governors and business leaders and funded by corporations and their foundations, to improve the skills of the workforce." OK. But I'm willing to bet a significant amount of my income that there's no causal relation at all between Algebra II and success in holding a top tier job. The only correlation is that smart kids tend to take Algebra II and smart kids also tend to go to college and end up in top tier jobs. Algebra II itself has nothing to do with it.

I'm a math nerd — or at least I used to be until I discovered I wasn't as smart as I thought I was — but this seems crazy even to me. What say you, commentariat?

Grasping Reality For Real

Ezra Klein makes an important but wonky point today about Paul Ryan's plan to cap Medicare costs: instead of capping growth at GDP + 1%, it caps growth at the rate of inflation:

Here’s the catch: The way GDP gets calculated includes inflation. So think of GDP+1% as the rate of inflation plus the rate of productivity growth plus one percentage point. With me so far?

....So let’s say that in 2024, inflation was 2 percent, productivity growth was 2 percent, and health-care costs grew at 6 percent. Under Ryan-Rivlin, Medicare and Medicaid would grow at 5 percent — a bit less than health-care costs in general, but not that much less. Under Ryan, Medicare and Medicaid would grow at 2 percent — beneficiaries would have to make up the difference.

This can all seem like so much gobbledygook, so here’s the bottom line: it’s totally unrealistic — and I say that as a cost control optimist. Look at the other health-care plans that have been proposed: none of them suggest they can get the growth of Medicare or Medicaid down to inflation*. But that’s where a lot of Ryan’s savings come from. Which is to say, either those savings aren’t real or we’re assuming America is going to abandon seniors and the disabled in a way that has no recent precedent.

This is all in service of Ryan's real goal. His document isn't primarily concerned with the federal deficit or with Medicare reform. The key goal in his budget is to reduce federal spending to 18% of GDP. Everything else is simply shoehorned in to meet that goal.

But it's an absurd goal. Over the past 30 years, federal spending has averaged about 21% of GDP. And since America is aging, even if we control costs carefully we're going to need to spend more money on the elderly. This isn't because we're being wildly generous toward them, it's simply because there are going to be more of them. So any realistic budget needs to assume that spending will slowly increase over time, ending up at maybe 25% of GDP a couple of decades from now. Ryan's 18% goal is just pie in the sky pandering to his tea party base.

Matt Yglesias agrees, "But I think it does set the stage in which the White House or someone in congress ought to produce a pie-in-the-sky counter budget." But why follow Ryan's pie-in-the-sky approach? Call me a crazy idealist, but why not propose something genuinely serious instead? Start with letting the Bush tax cuts expire. Add in Social Security reform that increases payroll tax revenue by about 1% of GDP and trims benefits by about 1% of GDP. Set a goal of cutting defense spending to 3% of GDP. Federalize Medicaid. Build on the reforms of ACA to rein in Medicare growth in a reasonable way starting now, a la Ryan-Rivlin. Raise additional revenue via a carbon tax and revenue positive tax reform. Agree on some genuinely bipartisan program cuts in areas like ethanol subsidies, farm support, and some of the least effective social programs. Keep PAYGO in place to restrain the growth of discretionary spending.

Something along these lines would be a genuine proposal. It takes from both left and right, it's not balanced entirely on the backs of the poor, and it deals realistically with the needs of an aging nation. And there are plenty of blueprints to pick and choose the details from. Politically it might be wiser to either stay quiet or else just throw out a Ryanesque piece of PR bait. But it would be more responsible to actually tackle the problem. If not now, when?

UPDATE: Ryan's plan caps Medicare growth at the rate of inflation, not inflation + 1% as I originally wrote. I've corrected the text.

How to Be Serious (Really!)

Just as a willingness to tackle Medicare (and healthcare costs in general) is the litmus test for being serious about the long-term federal deficit, there's a litmus test for being serious about the medium term deficit too. Here it is: you should be in favor of letting the Bush tax cuts expire in 2012. All of them.

There was a case for keeping them in place last year since the economy was still fragile. By 2013 this won't be true any longer, and letting the cuts expire would wipe out half of the federal deficit at a stroke over the next decade. What's more, since we'd just be reverting to the same tax rates we had in the 90s, when the economy boomed, we know that this would do no harm to economic growth.

This ought to be the first question you ask any deficit hawk. If they're OK with letting the cuts expire, then the conversation can continue. If not, they're just preening.

The Relentlessly Orthodox Mr. Ryan

Rep. Paul Ryan (R-Wisc.).

It's a bit of a fool's errand to think anyone is going to take this seriously, but I'm glad David Leonhardt brought up an obvious point today: if the federal deficit is truly an "existential crisis," and everyone has to sacrifice to get it under control, then there's no reason the elderly shouldn't have to sacrifice too:

There is nearly a bipartisan consensus that any cuts to Medicare and Social Security should spare the baby boomers and the elderly. And, certainly, retirees or people on the verge of retirement shouldn’t have their benefits changed radically. But the consensus, like Mr. Ryan’s plan, goes too far.

The reason is partly political. Older people vote in larger numbers than younger adults. And children, of course, can’t vote at all. But beyond politics, Washington’s age bias depends on a basic misunderstanding of the budget — namely, that older people have already paid for their Medicare benefits.

They haven’t. For most Americans, Medicare resembles a giant welfare program. They receive far more in government benefits than they ever pay in taxes and premiums. The gap for a typical household runs to several hundreds of thousands of dollars.

This is a point that few people ever make explicitly: today's retirees aren't merely getting benefits that they've paid for their entire lives. They're drawing way, way more from Medicare than they ever put into it. To make this concrete, here's an estimate from the Urban Institute of how much a single man who retired last year will get in lifetime Medicare payments. (All of this has been adjusted for inflation.)

This retiree is going to get three times more out of Medicare than he ever paid in. So if it's really true that everyone needs to sacrifice, then why should current retirees, who are getting such a sweet deal from the rest of us, be excluded from the pain?

This is just one of many ways in which Paul Ryan's budget plan is the farthest thing imaginable from courageous, even though that seems to be the most common adjective to describe it. Ryan ignores Social Security because he knows privatization won't fly and he doesn't have the courage to propose a mainstream reform of the system that would be unpopular with conservative mandarins. He exempts seniors and baby boomers from his Medicare plan because he doesn't have the courage to take on a powerful Republican voting bloc. He eschews details, basing the bulk of his plan on little more than theoretical spending caps, because he doesn't have the courage to explain what his spending reductions would actually mean. He focuses most of his cuts on programs for the poor because he doesn't have the courage to tackle weak claims rather than weak claimants. He gives the Pentagon a pass because he doesn't have the courage to stand up to hawks in his own party. And above all else, he refuses to consider tax increases of any kind because he doesn't have the courage to take on Grover Norquist and tell his own caucus what every genuinely serious analyst already knows: the only way to tackle the long-term deficit is with both tax hikes and spending cuts.

So explain to me: what's courageous about a Republican congressman proposing spending cuts for the poor, entitlement cuts only in the far future, tax cuts for the rich today, and hands off the Pentagon forever? Nothing I can think of.

The Future of China

A new paper suggests that countries start to experience growth slowdowns when their per capita incomes reach $17,000, a level that China will reach in about five years. Ryan Avent:

The story this suggests is one that's quite at odds with the prevailing view in much of the world—that China's relentless growth will continue until it dominates the global economy. Another possibility arises. Within a few years, we may be reading "What's the matter with China?" stories. A growth slowdown and demographic difficulties will challenge the policy status quo and could potentially expose serious weaknesses in the growth model (as Warren Buffet says, when the tide goes out, one sees who's been swimming naked). India, on the other hand, will be ascendent. And that could make for a very different set of policy challenges and priorities within the rich world.

I agree, and I'm surprised this isn't a more common narrative. Demographic problems alone put serious limits on China's future growth path, and the slowdown in productivity once they hit the $17,000 income level will make things even worse. China will plainly be a big player on the global stage for the rest of this century, but they're not going to take over the world quite as quickly as folk punditry often has it. This is something to keep in mind the next time some hawkish outfit releases yet another study trying to scare everyone into big Pentagon budget increases in order to stave off the future red menace.

The GOP's Shutdown Frenzy

A government shutdown now looks all but inevitable, and both parties are jockeying to make sure that the other one gets the blame. But I think this paragraph makes it pretty clear which party is really jonesing for a shutdown to happen:

House Republicans huddled late Monday and, according to a GOP aide, gave the speaker an ovation when he informed them that he was advising the House Administration Committee to begin preparing for a possible shutdown. That process includes alerting lawmakers and senior staff about which employees would not report to work if no agreement is reached.

Democrats are willing to endure a shutdown but are pretty obviously willing to compromise to avoid one. Republicans, conversely, really want this to happen. That's been obvious from the start, and we shouldn't allow anyone to let us to lose sight of this.

The Republican Wrong Turn on Medicaid

Although Medicare is getting most of the attention today, Paul Ryan's budget proposal also contains big changes to Medicaid. But Suzy Khimm reports that cuts to Medicaid aren't much more popular than cuts to Medicare:

But new polling from the non-partisan Kaiser Family Foundation also suggests that Medicaid is more popular than Beltway insiders might assume. Though public support for Medicaid lags slightly behind support for Social Security and Medicare, it's still robust: According to the KFF poll, only 13 percent of the public was willing to support major cuts to Medicaid....[Drew] Altman explains that part of the support for Medicaid comes from the services it provides for the elderly and disabled: though the program's usually described as an entitlement for the poor, seniors and the disabled make up two-thirds of Medicaid costs.

For what it's worth, I think Ryan's Medicaid proposal is far worse than his Medicare proposal. Basically, he endorses the Republican party line, which is to turn Medicaid into block grants for states, and then give states the freedom to spend it any way they want. But this is exactly the opposite of what we should be doing.

Here's the problem: states aren't allowed to run budget deficits, so when the economy turns bad they have to cut back on spending. But bad economic times are precisely when more Medicaid spending is needed. So unless Ryan is proposing to automatically increase those block grants whenever individual states or the country as a whole are in a recession — and he's not — this produces the worst possible dynamic you can imagine: a safety net that gets worse at exactly the times when it's needed most.

States have been experimenting with Medicaid for decades, and successes are few and far between. There just aren't any magic bullets here, and giving them more scope for experimentation isn't likely to produce any new miracles. A better bet would be to federalize Medicaid entirely. It's a huge burden to state budgets, and one that's especially burdensome during an economic downturn like the one we're in now. Ryan is right that there's really no good reason for Medicaid funding to be split between states and the federal government, but he's wrong about how to fix that. Medicaid shouldn't be a 100% state program, it should be a 100% federal program, one that's both a true safety net and a useful automatic stabilizer during recessions.

The Future of Healthcare

Since healthcare is the topic du jour, but Paul Ryan's Medicare plan doesn't really include enough detail to allow more than obvious critiques, here's a short post on an entirely different healthcare topic.

Ryan's budget document contains the chart on the right. Scary! It's based on CBO data, and it's a pretty standard fixture in healthcare debates. Basically, it shows Medicare spending rising at 8% a year forever, which means that eventually it overwhelms everything else and the country is broke. But how likely is that?

I don't mean likely in just the Steinian sense that, eventually, costs will be reined in simply because they have to be. I mean that I wonder if we've been brainwashed by the exploding costs of healthcare over the past 40 years into thinking that exploding costs are somehow inevitable in the healthcare field forever. Are they?

I can think of lots of technological revolutions that were pretty costly at first but eventually reached a point where they leveled out and then became cheaper. In fact, pretty much all of them. But perhaps healthcare is different in some ways from previous technological revolutions? For one, it's fairly labor centric and likely to stay that way. For another, costs really have been going up for a long time and there's not much relief in sight. By now, you'd think we'd be nearer the cusp of the curve where costs start going down, but we sure don't seem to be. New pharmaceuticals are as expensive to develop as ever. Cancer treatments keep getting more costly, as the construction of $100 million proton therapy centers demonstrates. And overall per capita healthcare costs just keep climbing inexorably.

Still: do we really think this is going to keep up forever? If it does, it will be pretty much the first time in history. I'm enough of a technological optimist (and a believer in the power of markets) to guess that someday — 10 years? 20? 30? — things like gene therapies, personalized pharmaceuticals, medical AI, and so forth are finally going to revolutionize medicine. And when that happens, costs will plateau at first and then drop. The curve simply won't keep going up forever.

Now, granted, we can't plan on that. There are no guarantees, after all, and maybe medicine will end up being an exception to the usual rule of technological progress. What's more, folks like Paul Ryan could plausibly claim that this makes voucher plans like his more reasonable: if costs don't come down, then we'll have little choice but to cap them bluntly the way his plan does. And if they do come down, then his caps won't have a serious impact.

I don't really have a position here. I'm just musing out loud about the likely future trajectory of healthcare, and whether we're really looking at it through the right lens. Right now we're tacitly assuming that what's happened in the past will inevitable keep happening into the far future. But there's really not much reason to think that's true. Is there?