Why Do We Keep Jumping Over the Fiscal Cliff with Bungee Cords?

Updated January 11, 2013

As I and many others predicted, we didn’t plunge down the fiscal cliff at the end of 2012. But we’ll be back at the edge again soon, for refusing to borrow the money required to pay bills Congress has already rung up, or for threatening some extraordinarily badly designed sequestration or across-the-board cut in discretionary spending. And while I didn’t think last month that politicians would let tax rates skyrocket at the beginning of 2013, and I don’t think now that they will refuse to pay foreign lenders, Social Security recipients, or doctors, I don’t like jumping over cliffs with bungee cords attached. It’s a notoriously bad use of time and energy. Plus, I don’t trust the bungee cords.

Either way, people keep asking, why can’t these guys and gals just get together and compromise?

The main answer, I believe, goes beyond silly pledges not to raise taxes or touch anyone’s Social Security benefits. It’s the failure of both political parties to come clean on either the math or its implications, and the accompanying failure to reframe the public debate after our contentious last election.

Consider the plethora of misleading political rhetoric that both parties use in playing the blame game and asserting how they are trying to protect the middle class from bearing any burden for anything, any time, and anywhere. Almost every statement by President Obama or Speaker Boehner emphasizes how much he wants to protect 98 or 99 or 99.5 percent of us from having to pay more in taxes. That a middle-class family might have to pay a couple of thousand dollars more (the Tax Policy Center estimate of the tax increase for the median-income family if we had gone over the cliff at the end of 2012) is put forward as horrendous and unfair to those who “play by the rules.”

Wait a second! We are running deficits of about $9,000 per household a year right now. Those bills don’t disappear simply because we refuse to pay even $2,000 of them currently. We merely shove those costs to the future, mainly onto the young, some of whom are too young to vote. Convincing people that they can’t possibly afford to get by with $2,000 less when they’re running up credit card bills of $9,000 a year is simply dishonest. If we aim to borrow $2,000 less from foreigners by 2015 or 2016, for instance, it may mean that by then we also must consume $2,000 less relative to what we produce as a society, even if we “play by the rules.”

Let me be clear. Most economic analysis says that a country can’t dampen consumption too quickly without threatening economic growth. Still, the basic bind that both parties placed on themselves comes from promising so much to the middle class in terms of both high benefits and low taxes. The public fight over the fiscal cliff centered mainly on taxing the rich. But spending, mainly in unsustainable growth in health and retirement programs, remains the dominant long-term issue. Confining tax increases to a very small share of the population doesn’t exempt the middle class from dealing with those issues; to the contrary, it only increases the burden they must bear in spending cuts in lieu of the tax increases they avoided.

Neither party, however, can easily go to the middle class and say, “Look at how I protected you from paying more taxes so you can now get fewer benefits.” Each side criticizes the other for not offering much on reform of large health and retirement programs, but they know the consequences for leading. If the Republican Party presents its proposal first, it knows that Democrats will immediately claim that Republicans favor cuts in, say, Medicare over yet-further tax increases on the wealthy. If the Democratic Party presents any adjustments to eligibility or benefit levels, it risks losing a large share of its constituency and abandoning the one issue on which it has won elections for so many years. It’s not that the Democrats won’t compromise, they just want to be able to blame Republicans for whatever happens to the middle class. Similarly, it’s not that Republicans don’t want entitlement reform, they just don’t want to bear the brunt of the criticism by themselves.

To make matters even more complicated, almost all the bargaining centers only on ameliorating, not resolving, our long-term problem. This means the fight will continue for years, so each party wants to position itself for the next and then the next round of debates.

The broader issue needs to be reframed, somewhat like Erskine Bowles and Alan Simpson did, with a fuller, shared-party explanation to the public that we’re all in this together. It was too late for that at the end of 2012, and will be too late again the next time we focus our attention primarily on avoiding some precipice. But without that broader type of effort, this fight is not going away for a very long time.

The Individual Mandate and the Math-less Health Reform Debate

Regardless of how the Supreme Court decides the constitutionality of the individual mandate, the health care debate is now reignited. If the mandate is sustained, the Accountable Care Act enacted under President Obama still has too many kinks to remain unaltered. If it’s thrown out, a return to the unsustainable system with growing numbers of uninsured is not a solution. Yet no fix is possible as long as elected officials dodge the basic arithmetic of health care.

As for the individual mandate, ignore the constitutional briefs for the moment. Ignore also how a mandate helps address problems that arise if insurance companies must offer coverage regardless of prior conditions and people otherwise are tempted to wait until they are sick to buy it. Instead, let’s see how a mandate fits it into the broader arithmetic of paying for health care.

Here are the numbers: The United States spends about 18 percent of its economic output (GDP) on health care each year. That comes to about $23,000 of health care spending per household. The CBO estimates that in 2016 a family of four with $60,000 in total income and benefits would spend, or have spent on its behalf by employers or government, about a third of that amount on health care. If all federal and state government health spending and subsidies were covered with a flat tax on total adjusted gross income nationwide, the required rate for its health policies alone would be about 18 percent. If the government were to cover all health costs, that rate would climb to 32 percent. With all this in mind, lawmakers determined under health reform that the maximum a family should pay for health insurance when bought from an exchange is about 10 percent of its income.

Of course, we are already spending much more on health care than what politicians say we can afford to pay, so where does all the extra money come from? Medicare taxes and income taxes pay to cover those on Medicare, Medicaid, and other government programs. Workers get significantly less cash compensation when working for employers providing health insurance. We borrow a lot from China and other foreign countries, and, more recently, from the Federal Reserve.

The system is cracking from this simple disconnection between what we pay and what we think is the most we should pay. And no recent health reform effort can be understood without seeing how that disconnection drives the policy choices.

No one, Democrat or Republican, is willing to collect enough taxes to cover even the government’s current costs—much less the costs that would arise with greater government provision. No politician will level with the public about the true cost required to support our existing health programs and tax subsidies. More taxes have limited sway for other reasons as well: while we do need to start paying more of our bills for broad budgetary reasons, why should additional tax dollars be spent on such an expensive health system rather than other social priorities?

The Affordable Care Act attempted to cover new costs without adding significantly to tax burdens. The individual mandate was one way it tried to force us to pay, at least for ourselves. The law also included an employer mandate designed to prevent employers from dropping employee health insurance (since many employees’ tax subsidies are worth far less than the new exchange subsidies that cover insurance costs above 10 percent of family income). Congress also tried to box in states to contribute as much or more than they already do to Medicaid, another part of the constitutional debate.

None of those efforts, however, tackle the original sin driving health costs. Whether dealing with the old or the young, the government’s health programs are open-ended. Both we as customers of health care and our doctors, drug companies, and other providers are empowered to spend more on our care and, as a result, increase taxes on others or impose costs on others within our insurance plans. Both political parties are afraid to take this power away from us or health providers. Only very tentatively has Congress tried to empower boards to constrain costs, or to convert Medicare to more of a premium support or voucher system—and only with an outcry from one political party whenever the other is the first to suggest that anyone anywhere might get less. The political contradictions abound: Democrats want premium support for the young and oppose it for the old; Republicans want premium support for the old and oppose it for the young.

Meanwhile, as costs keep rising, more people either can’t or won’t pay for their health care and turn to others for their support—either through government programs or just showing up at the emergency room and letting the insured cover those costs.

Extend the arithmetic beyond health care, and other budget problems reveal themselves as well: a dramatic reduction in the share of government spending for children, education, and investment; limited growth in take-home pay of middle-income workers as employer-provided health insurance costs rise rapidly; and a decline in government’s flexibility to respond to the next emergency, attack, or recession.

The Supreme Court may well throw some balls back into the air, but how much will it resolve? For the most part, very little. It remains a math-less debate.

Health Reform: An Amicus Brief for the Court of Public Opinion

The Supreme Court will consider the constitutionality of the Affordable Care Act at the end of the month. We the public should be appalled.

It’s not that each side can’t come up with some good constitutional arguments. It’s that the suit is totally unnecessary, caused largely by the unwillingness of the major political parties to work together on anything. Like a divorce between two parties more invested in their fight than in the effect on those around them, it belongs in a domestic relations court that would refer the parties to a mediator.

In theory, the Supreme Court is considering the narrow question of whether the federal government can mandate that individuals purchase health insurance (and, to be technical, whether there really is a “mandate” or just a “tax”). In practice, the Court is responding to a fundamental failure of the legislative process to fix even the simplest of things. To understand the genesis of this failure and of the mandate, one has to go back a bit into recent history.

The modern debate over mandates came about during the Clinton administration, which centered much of its health reform efforts on requiring employers to provide health insurance. Such a mandate, as some of us noted at the time, would operate like a corporate tax passed through to individuals, effectively adding substantially to a minimum wage that had to be paid in the form of health benefits, but very unevenly.

Rather, we reasoned, the basic argument behind a mandate hinged on the individual: you, me, and the other folks down the street. Many people who could have paid for their health care did not. They spent their money on other things, avoided buying insurance, then went to emergency rooms that couldn’t turn them away or tried to buy last-minute health insurance when they got sick. Everybody else got stuck covering their costs.

This raises issues of both equity and efficiency. Should one moderate-income family be allowed to get free benefits for which a similar family pays? Should we encourage people not to buy insurance when they think they can go sometimes to the emergency room for free?

Further complicating the issue is the extraordinary cost of health care: the average annual price tag per household (including what they pay for others through taxes) tops $20,000. It’s now almost impossible to tax and spend our way toward universal care. The government would need to set a payroll tax rate surpassing 40 percent to cover all health costs.

So subsidies, or carrots, alone aren’t enough. A combination of sticks and carrots might get us a lot closer to universal care, partly because many people don’t like the idea of paying any penalty whatsoever.

But sticks have complications, too. We know the IRS and other agencies have huge problems collecting bills from the public, especially large ones. In practical terms, we simply can’t implement a mandate, only a modest penalty.

The simplest way to devise a stick, I recommended at the time, was to deny other benefits, such as a child tax credit, or low interest rates on student loans, or itemized deductions to those who did not purchase health insurance. This would be far easier to administer than a scheme of new health mandates or taxes.

And here’s the crucial point for the court debate: there is no constitutional debate over whether the government can set conditions on the receipt of benefits it provides. Done this more effective and easy-to-manage-way, there would be no court case to hear!

But Republicans and Democrats prefer to have their fight. In the hubris of the health reform legislation, Democrats created whole new systems of taxation and welfare, while ignoring the fundamental and difficult history of administering these systems.

Republicans, in turn, cast their attention on any fight they could win politically, legislatively, or in the courts, forgetting that in the early 1990s, they liked the individual mandate. If they win and get fewer or no penalties, after all, they will only add to the number of people who end up getting subsidized and for whom more taxes need to be collected. Democrats, in turn, didn’t like the individual mandate then. They thought that they could hide any new tax better when assessed on corporations.

As with so many other aspects of our deeply partisan divide, we’re having a needless fight over something easily resolved. The clean solution can’t be adopted because Democrats don’t want to admit they made any mistake in the Affordable Care Act and Republicans don’t want to fix any part of health reform. A domestic relations court would look at these sparring spouses and send them to a mediator. The Supreme Court decision likely will only confuse the real debate over how subsidies, penalties, taxes, and mandates must combine in any health program, old or new, Republican or Democrat, small or large.