Category Archives: More Political than Economic

Romney’s and Ryan’s Confusion on Basic Accounting: Medicare Cost Savings is Not a Raid on Medicare

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From a Romney / Ryan TV ad currently being broadcast:   “Obama has cut $716 billion dollars from Medicare,” says the narrator. “The money you paid for your guaranteed health care…is going to a massive new government program that’s not for you.”

Mitt Romney in a stump speech in Ohio on August 14:   “Did you know that he’s taken $716 billion out of the Medicare trust fund?  He’s raided that trust fund.  And you know what he did with it?  He’s used it to pay for Obamacare”

Paul Ryan in an interview on Fox News Channel:  “We’re the ones who are not raiding Medicare to pay for Obamacare”

(all three sources quoted in this ABC News story)

Over the last several days there have been incredible allegations from Mitt Romney, his proposed running mate Paul Ryan, and their campaign, that Obama is raiding the Medicare Trust Fund for $716 billion in order to pay for Obamacare.  The statement has been made with such certainty and certitude, and repeated so often, that one assumes there must be some element of truth behind it.   Not surprisingly, many news services are reporting it as fact, and a good deal of digging is required to find out what Romney and Ryan are in fact referring to.  And since it is so basic, one wants to double-check and triple-check to make sure something has not been missed.

But the basic conclusion is inescapable:  Either Romney does not understand basic accounting (and given his business career, one would assume he would), or he is trying to deliberately mislead the public.  And Ryan appears to be completely confused on the difference between cost savings and cost increases.

First of all, everyone agrees that the $716 billion number comes from the Congressional Budget Office, from a July 24, 2012 report produced at the request of Speaker of the House John Boehner.  The report analyses the impact on the budget over the ten year period 2013 to 2023, if the Affordable Care Act of 2010 (“Obamacare”) were repealed, as his draft bill H.R. 6079 would do.  Since the analysis is looking at the impact on public spending and revenues from the repeal of Obamacare, one needs to be careful on the mathematical sign of the changes projected.  Most analyses look at the impacts on spending and revenues that will follow as a consequence of Obamacare being approved.    This is looking at the reverse.  And while it is important to keep this straight, I don’t think this is the source of Romney’s and Ryan’s error.

The $716 billion figure is an estimate by the CBO of the higher costs that Medicare would incur if Obamacare were reversed.  The primary reason Medicare will enjoy savings as a result of Obamacare is that hospitals and other health facilities will not bear the uncompensated costs they now incur when they treat the uninsured.  Everyone recognizes, even Romney and Ryan, that the number of uninsured will go down under Obamacare.  Like everyone else, the uninsured often require medical care, and currently hospitals and other facilities will not turn anyone away for at least initial treatment, either in accordance with their own ethical standards, or in some States in accordance with the law.  But the costs need to be covered somehow, and hospitals and other facilities currently shift these costs to those who are insured, either by Medicare or by private insurance.  As the current uninsured become insured under the Obamacare system, hospitals will no longer have to shift these costs onto Medicare and other insured patients, and Medicare (as well as private insurance) will save.  The $716 billion figure is the CBO’s estimate of the savings Medicare will receive as a consequence of reducing the number of uninsured.  There will still be uninsured patients, but there will be fewer.

The CBO in fact presents a break-down of these estimates across some major categories.  Mathematically, I will present them here as the savings that would follow if Obamacare is implemented rather than reversed.

CBO estimates of ten year savings, 2013-2022.   In $ billions.
A.  Lower Medicare payments to facilities, currently needed to compensate for care to the uninsured: $415b
   1)  Hospitals                                    $260b
   2)  Skilled Nursing Facilities              $39b
   3)  Hospice Services                         $17b
   4)  Home Health Services                 $66b
   5)  All Other                                        $33b
B.  Lower Medicare payments needed to hospitals serving a disproportionate share of low-income patients  $56b
C.  Lower Medicare subsidies to the Medicare Advantage option $156b
D.  All other  $89b
TOTAL $716b

Medicare and the Medicare Trust Fund (and private insurance as well) will therefore save enormous amounts when the cost shifting that currently occurs because of the large number of uninsured, will be reduced as the uninsured become able to obtain their own medical insurance under the Obamacare system.  There will still of course be costs for the currently uninsured to obtain new health insurance coverage.  Part will be borne by the currently uninsured when they are able to purchase coverage currently beyond their reach (as prices for individual coverage can be extremely high in the current US system, due to adverse selection problems; such prices will come down under Obamacare due to the universal mandate).  But part will be borne by the government, whether through direct subsidies to those of lower income to pay part of the costs of their health insurance, or the direct costs of an expanded Medicaid.  These costs are reflected in the CBO estimates of the overall costs of implementing Obamacare.  For consistency, the CBO then estimated also what Medicare would save (an estimated $716 billion) when there is less cost-shifting by hospitals and other facilities to cover care for the current uninsured.

What Romney either never understood or is mis-representing, is that the savings Medicare will receive as a result of increased coverage of the uninsured under Obamacare, is not a “raid” on the Medicare Trust Fund.  Indeed, it is the exact opposite.  Medicare will enjoy an estimated $716 billion in savings as a result of Obamacare, and hence the funds in the Medicare Trust Fund will go further than they would without such savings.  And the CBO, in estimating the expected ten-year overall cost of the Obamacare reforms, correctly reflected such savings in lower Medicare costs.

What is completely disingenuous is the Paul Ryan comment that he is not “raiding” the Medicare Trust Fund under his plan (which Romney says he supports), while Obama is.  In recent days, it has been pointed out that buried in the Paul Ryan budget proposal (approved by the Republican House), are cuts to Medicare of the same $716 billion.  Ryan has reluctantly acknowledged that they are there.  But when asked today while campaigning in Ohio why his budget plan includes the same $716 billion cut, Ryan responded:

“First of all, those are in the baseline, he put those cuts in,” Ryan said, referring to Obama.  “Second of all, we voted to repeal Obamacare repeatedly, including those cuts. I voted that way before the budget, I voted that way after the budget.  So when you repeal all of Obamacare what you end up doing is that repeals that as well.”

“In our budget we’ve restored a lot of that,” Ryan continued. “It gets a little wonky but it was already in the baseline.  We would never have done it in the first place.  We voted to repeal the whole bill.  I just don’t think the president’s going to be able to get out of the fact that he took $716 billion from Medicare to pay for Obamacare.”

The confusion here is breathtaking.  The $716 billion reduction in costs that Medicare will incur are in the Obama budget precisely because Obamacare would be implemented, and hence the number of uninsured reduced.  The hospitals and others will not then need to shift the costs of treating the uninsured onto Medicare and others of us who are fortunate to have medical insurance.  But Ryan would repeal Obamacare, and hence these savings to Medicare would not materialize.  Medicare would need to spend more if Ryan gets his wish, and if in his budget he would then cap what Medicare could spend to $716 billion less than then needed, Medicare would no longer be able to pay in full for the medical costs of its seniors.  If Medicare spending is not capped (and there is no current legal basis for it to be so capped), the extra $716 billion in Medicare costs would go straight to an increase in the deficit over what the Ryan budget projects.

Paul Ryan delights in being treated as a “policy wonk” who supposedly knows his numbers.  If he does, then he is seriously misrepresenting the truth.  And the best that can be said about Mitt Romney is that this might be an issue which he does not really understand, and hence has accepted as correct the position that Ryan (and other Republican advisors) have repeatedly stated.  The alternative is that he too understands that this is a complete misrepresentation of what the CBO has estimated.

Republican Tax Plans, Part 4: Romney Goes for Even Larger Tax Cuts, Mostly for the Rich

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Average tax rates by household income level, Republican tax proposals, Romney tax plans
Mitt Romney, the now all but certain Republican nominee in this year’s presidential race, presented not one, but two, comprehensive tax plans this campaign season.  Romney’s original plan was released in September, 2011, and the implications for who would pay lower taxes (the rich, and especially the very rich), and in a few cases higher taxes (poor people with income up to about $30,000, in comparison to what they would pay if the Bush tax cuts were extended), was discussed in a blog posting on January 7.  It was noted there that while the rich would see very large cuts in their taxes (leading to an increased federal deficit of $600 billion per year by 2015), Romney’s tax proposals were in fact the least extreme of those of his competitors in the Republican primaries (see the analysis at the postings on December 26, 2011, and on January 25, 2012, in addition to the January 7 post).

Faced with these competing proposals for even deeper cuts in taxes, Romney felt compelled to announce a revised tax plan on February 22, which was even more right-wing than the one he had proposed the preceding September.  This was consistent with Romney’s history of changing positions based on what is politically opportune at the moment.  For completeness, it is of interest to add this second Romney plan to the analysis of the other tax proposals, including his own earlier one, to see how they compare.

The average tax rates under Romney #2 that would be paid by households at various income categories has therefore been added to the standard graph above.  As with the earlier blogs, this presents graphically the careful calculations done by the Tax Policy Center, using their tax microsimulation model (based on actual tax return data) to determine the taxes that would then be due for households of various income categories as a result of what was being proposed.  While the diagram has now become fairly cluttered, hopefully it is still clear enough to follow.  I wanted to present the two Romney plans in the context of both each other and of the other Republican plans.

Compared to the other Republican plans, Romney’s new proposal would still generally leave taxes higher than the others would for most households (Cain is an exception, with his hugely regressive tax proposals, and Perry would have left taxes higher than Romney for those making up to $200,000 but would have cut them by even more for the very rich).  But compared to his earlier proposal, Romney would now cut taxes by even more, especially on the rich and very rich.  Compared to current law (under which the Bush tax cuts are scheduled to expire in 2013), Romney would now provide those making more than a $1 million per year in income an average reduction in their taxes of $390,000 each year, vs. a reduction of “only” about $290,000 in his earlier proposals.

The Romney #2 proposals lead to greater benefits for the very rich not simply because with their higher income they pay more in taxes, but also because he now focuses his proposed tax reductions even more heavily on the rich.  Whereas in Romney #1, those making more than $1 million each year would see their taxes reduced by 26%, under Romney #2 he would reduce the taxes of his wealthy colleagues making over $1 million by 35%.  In contrast, poor households with total household income in the range of $40 to $50,000 would see a tax reduction of 13% under Romney #1 and only 19% under Romney #2.  There is no rationale for why the super rich should see not simply a larger absolute reduction in the taxes they would need to pay, but also a greater proportional reduction in their taxes.

And if one is worried, as the Republican candidates say they are, about the fiscal deficit, then one must not ignore that these major tax cuts will lead to a huge increase in the deficit.  The Tax Policy Center estimates that if implemented, the Romney # 2 plan would reduce fiscal revenues by $900 billion in 2015.  This is 50% more than the loss of an estimated $600 billion under Romney #1.  And of the $900 billion lower revenues, well over half ($505 billion) would be a transfer to those making more than $200,000 per year, and over a quarter ($236 billion) would be a transfer to households making over $1 million per year.

Romney insists he will not cut defense expenditures.  Indeed, he says he will increase defense spending over what Obama would.  But total non-defense discretionary government expenditures in 2015 are only projected to be $572 billion in 2015 according to the baseline projections of the neutral Congressional Budget Office (January 31, 2012, report).  Even if all such government expenditures were cut to zero, the deficit would still rise under Romney #2 by $330 billion.  The only alternative would be to cut Social Security, Medicare, Medicaid, and other such programs, which primarily benefit the poor and middle class.  If so, Romney is proposing to cut such programs in order to benefit primarily the rich and super-rich.

To be fair, Romney does say he would also propose to close some tax “loopholes”, but he refuses to say which he would propose to close or reduce, and by how much.  He has said openly it would not be politically expedient to be clear on this before the election.  But he has said that he would keep certain of the more common tax deductions, such as the exclusion for home mortgages for primary homes, and would actually increase certain of these tax expenditures, by cutting further the already low taxes on capital gains and dividends, and by extending further certain corporate tax breaks (such as on overseas income).  If one does this, it is impossible to raise anything close to $900 billion a year by cutting or reducing other tax expenditures.

Romney has presented himself as the serious, businessman, candidate.  Yet he chose to revise his initial tax plan and propose an even more radical plan focused on tax cuts for the rich as part of his (ultimately successful) campaign to secure the Republican nomination for the presidency.  While consistent with Romney’s history of adopting positions based on what is politically expedient at the moment, a plan that would increase deficits by $900 billion a year by 2015 cannot be seen as serious.

Mitt Romney’s Economic Policy Address: Full of Factual Errors

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On March 19, Mitt Romney presented at the University of Chicago a (mercifully short) policy address that laid out his criticisms of Obama’s economic policies (see here for a transcript).  The primary theme was that under Obama, high taxes and an overbearing regulatory burden have stifled “economic freedom” and that “The Obama administration’s assault on our economic freedom is the principal reason why the recovery has been so tepid”.

Romney’s address is interesting as it illustrates well how even such carefully prepared addresses in the current Republican campaign have been replete with factual errors.  A listener to such presentations will normally presume that the speaker will have gotten their facts right, and they will distinguish factual statements with statements of opinion.  The listners may or may not agree with the opinions, but they will normally give the speaker the benefit of the doubt on factual statements.  Unfortunately, political discourse in this Republican campaign has degenerated to the point where numerous statements, carefully prepared and presented as fact, are simply not true.  But by repetition, it is not surprising that many in the American public have become confused into thinking such statements are true when they are factually wrong.

Perhaps the most basic and glaring of the factual inaccuracies in Romney’s speech (and a cornerstone of his argument in the speech) is his statements that taxes (and tax rates) have risen under Obama.  But federal taxes have been repeatedly cut under Obama, at a total cost to the budget of close to $1.5 trillion (as estimated by the bipartisan Committee for a Responsible Federal Budget):

Tax Cuts Signed Into Law by Obama
Date Signed Amount ($b)
A.  Tax Provisions in 2009 Stimulus Package 2/17/09 $420.0
B.  2010 Tax Cut Package 12/17/10 $880.9
C.  2012 Payroll Tax Cut Extension 12/23/11 and 2/22/12 $115.5
D.  Other – Various Dates in 2009 and 2010 various $64.2
TOTAL $1,480.6

$1.5 trillion in tax cuts is not small, and one would think hard to ignore, yet Romney asserts that big tax increases under Obama have stifled the recovery.  And in addition to the $1.5 trillion in tax cuts, there has not been a single tax increase under Obama.

In large part because of these policy actions cutting taxes, federal government revenue during the Obama presidency has been the lowest of any presidency since 1950.  Between 1951 and 2008, government revenues varied between a low of 16.1% of GDP and a high of 20.6%, and averaged 18.0%.  Revenues were 17.6% of GDP in 2008, the last year of Bush.  During Obama’s term, the share was 15.1%, 15.1%, 15.4% and a projected 15.8% for 2009 to 2012, respectively.  Yet Romney condemns increases in taxes as stifling the recovery.  It would be more accurate to say that major cuts in taxes have not led to a strong recovery.

It may well be the case that Obama would have preferred a better balance in the extensive tax cuts, and it is true that Obama has proposed selected tax increases (e.g. on those making more than $250,000, and a minimum tax rate on those making more than $1 million a year).  But these have not been enacted.  Yet Romney asserts that as a result of Obama, businessmen are facing a higher tax (as well as regulatory) burden, and that “those taxes and costs add up.  Businesses shut down.  Jobs disappear.  Entrepreneurs decide it’s too risky and too costly to invest and to hire.”

The other half of the Romney assertion (in addition to big tax increases), is that Obama has burdened businesses with stifling regulations.  Yet as has been noted before in this blog, productivity growth has in fact been quite strong during the Obama term.  Stifling regulations would have hurt productivity, yet multifactor productivity rose in 2010 by more than it had in any other single year since the data series began in 1987 (see here); labor productivity has increased in the current recovery at a pace similar to the highest it has in any recovery in the past four decades in the US (see here); and the increase in labor productivity under Obama while wages have been flat have in fact led to a sharp rise in profits of American businesses (see here).  None of this is consistent with Romney’s assertion that burdensome regulations under Obama have held back businesses.  Rather, businesses are not producing and employing more because there is not a demand for what they can produce (and profitably produce; see here).  And demand has been deficient in large part due to the reduction (not increase, as Romney asserts) in government demand (see here).

Romney supports his assertion that overbearing regulations under Obama have led to the slow recovery simply through several anecdotes.  But his choices of anecdotes are interesting, as the specific ones cited stem from cases that arose during the Bush administration.  Specifically, he asserts that over-reaching regulators “would have banned Thomas Edison’s light bulb”.  And then immediately says “Oh yeah, Obama’s regulators actually did just that.”  But actually, Obama’s regulators are enforcing a law passed and signed by Bush in 2007.  I assume that Romney would have complained even more loudly if Obama had chosen to ignore a law that is on the books, despite his constitutional requirement to enforce the laws.

Another example is of a case where the EPA was enforcing a law against development of land in a wetlands area, with Romney saying the regulators would not even allow the individuals to pursue a case in court against it.  But the Supreme Court in fact issued a decision on the case the same week as Romney’s speech in Chicago.  And most relevant is that the EPA originally moved to protect this wetland in 2005, in the first year of Bush’s second term.  This was not a case brought under Obama.  But Romney did not blame over-zealous regulators under a Republican administration.

Romney also makes the claim that the federal government has exploded under Obama, with 140,000 new federal employees hired.  But the figures on federal government employment issued by the Bureau of Labor Statistics (as part of their statistics on employment in all of the main sectors) shows that federal government employment only rose by about 30,000 between January 2009 and February 2012 (a total increase of 0.9% over a period of more than three years, or 0.3% per year).  Furthermore, if one excludes an increase of 60,000 in civilian Defense Department workers, federal government employment in fact fell by 30,000 over this period.  It appears that Romney is quoting a figure on federal employment that excludes US Postal workers, even though the official statistics of the BLS includes them.  Even if one makes this selective choice of what statistics to cite, an increase of 140,000 federal workers (excluding postal workers), is an increase at a rate of only 2.2% per year.  This is not an explosion.  And Romney ignores the sharp reductions of state and local government workers in recent years.  Total government workers (state and local, as well as federal) have fallen by 580,000 over this period, contributing directly to a substantial share of the unemployed.

Romney also criticizes Obama on some more substantive points, on which differences of opinion are fair.  Specifically, he criticizes the Dodd-Frank bill that changes regulation of the financial sector, which Obama signed into law, and he criticizes changes in regulation of oil and gas drilling in the Gulf of Mexico.  On matters such as these, there can be substantive differences, and political campaigns should center on such issues.  However, I would have thought it would be clear that after the biggest financial meltdown in US history, caused by absence of regulation to control the risks that built up in the financial system in the housing bubble, that better and smarter financial regulation was needed.  And after the Deepwater Horizon off-shore oil platform blew up in 2010, with loss of life and almost 5 million barrels of oil released to the sea, that better regulation of such drilling activities was needed.  Romney and other political figures may disagree, but that is what elections are for.