Krugman and Obama mislead on debts and deficits

By James D. Agresti
March 18, 2013

In a March 10th New York Times column, Nobel Prize-winning economist Paul Krugman wrote, “we do not, repeat do not, face any kind of deficit crisis either now or for years to come.” Citing recent projections from the Congressional Budget Office (CBO), Krugman insisted that “the case for making the deficit a central policy concern … has now completely vanished.” Three days later, President Obama echoed these sentiments on ABC’s “Good Morning America,” stating, “We don’t have an immediate crisis in terms of debt. In fact, for the next 10 years, it’s gonna be in a sustainable place.”

Those assertions are based on federal budget projections in CBO’s latest “Budget and Economic Outlook, but Krugman and Obama misrepresent these projections and ignore what this report explicitly states—which is that the U.S. government is on a path of “high and rising debt” that will have “serious negative consequences.”

First, the claims of Krugman and Obama hinge upon an unrealistic assumption that future budgets will follow CBO’s “baseline” scenario. When CBO analysts produce budget projections, they typically calculate a “baseline” scenario (which approximates current law) and an “alternative fiscal” scenario (which approximates current policy). These can be markedly different because certain current laws require future policy changes that are either impractical, untenable, or place significant burdens on the American people. The claims of Krugman and Obama are based on projections that assume these policy changes occur, when in fact, some of them have practically no chance of happening.

For example, less than a year from now, current law requires a “25 percent cut in Medicare’s payment rates for physicians,” but as the Medicare Trustees Report emphasizes, it is a “virtual certainty” that congress and the president will not allow these cuts to occur. This disconnect between current law and current policy stems from a 1997 law that was intended “to limit growth in spending on physician services to a sustainable rate, roughly in line with the rate of overall economic growth.” However, the law failed to work as planned, and in 2002, the New York Times reported, “For the first time, significant numbers of doctors are refusing to take new Medicare patients, saying the government now pays them too little to cover the costs of caring for the elderly.” Hence, legislators have overridden this law through a provision known as the “doc fix” for every year since 2003, and this is widely expected to continue in the future.

Significantly, the “doc fix” is not about maximizing profits for healthcare providers but ensuring that Medicare beneficiaries have access to care. Medicare pays hospitals an average of 10% below their costs of caring for Medicare patients, and Medicare pays physicians about 20% below private insurance rates. Cutting Medicare physician payments to 25% below this would bring these rates to levels proven to cause major problems with access to care. Government cannot consistently pay healthcare providers less than their costs of treating patients and expect them to keep treating them. The current-policy projections account for this reality, while the current-law projections that Obama and Krugman cite do not.

Exactly how large is the divide between current law and current policy? Under current law, CBO projects the budget deficit in 2015 will be $430 billion, whereas under current policy, CBO projects the deficit will be $644 billion—or 50% higher. Likewise, under current law, CBO projects that publicly held federal debt will grow from 72.5% of GDP to 77.0% during fiscal years 2013-2023, which is a 6.2% increase. In contrast, under current policy, CBO projects that publicly held debt will rise to 87% of GDP over this period, which is a 20% increase. This fact deflates Krugman’s claim that “budget office projections show the nation’s debt position more or less stable over the next decade.”

Worse yet, even under the unrealistic current-law scenario that Krugman and Obama assume, CBO is clear that “the projected path of the federal budget remains a significant concern,” because debt is already “very high by historical standards” and will remain so. CBO details the ramifications of this:

If the amount of debt held by the public remains so large, federal spending on interest payments will increase substantially when interest rates rise to more normal levels. Because federal borrowing generally reduces national saving, the stock of capital assets, such as equipment and structures, will be smaller and aggregate wages will be less than if the debt were lower. In addition, lawmakers will have less flexibility than they ordinarily might to use tax and spending policies to respond to unanticipated challenges. Moreover, such a large debt poses an increased risk of precipitating a fiscal crisis, during which investors would lose so much confidence in the government’s ability to manage its budget that the government would be unable to borrow at affordable rates.

In simple terms, even under the highly optimistic current-law scenario, federal deficits and debts will suppress workers’ wages, degrade the government’s capacity to weather challenges, and could trigger a financial crisis. Furthermore, CBO states that these projections “do not fully reflect long-term budgetary pressures” caused by an aging population, rising healthcare costs, and subsidies of the Affordable Care Act. In the words of CBO, these factors “will substantially boost federal spending on Social Security and the government’s major health care programs, relative to GDP, for the next 10 years and for decades thereafter.”

Regarding these long-term budget stresses, Krugman writes, “I have yet to see any coherent explanation of why these longer-run concerns should determine budget policy right now.” For this, he need look no further than CBO’s latest long-term projections, which explain that “postponing action would substantially increase the size of the policy adjustments needed to put the budget on a sustainable course.” Likewise, CBO’s latest short-term projections state that making changes now “would allow for gradual implementation, which would give households, businesses, and state and local governments time to plan and adjust their behavior.”

CBO also emphasizes that actual budget outcomes could be far removed from projections because of “unanticipated changes in economic conditions” and “a host of other factors that affect federal spending and revenues.” To underscore this point, CBO notes that “even relatively small deviations can have a substantial impact on budget deficits.”

Contrary to what Krugman and Obama claim, CBO projections indicate that federal deficits and debts threaten workers’ wages, government’s ability to fund its programs, and the overall health of the economy. Thus, when politicians and commentators mislead citizens into thinking that “we don’t have an immediate crisis in terms of debt,” they hinder public support for actions that could stem the negative consequences of this debt.

Additional reading:
Blame for the national debt

Consequences of the national debt

Federal government finances deteriorated by $6.5 trillion in 2012

8 thoughts on “Krugman and Obama mislead on debts and deficits

  1. What does the text mean? That the billable doctor hours cost more than what the gov is willing to pay? Then the doctors lower their cost for billable hours! Just like what happens when insurance pays only a certain amount. The rest is eaten by the healthcare provider. This is nothing new and has been done by insurance companies for years.
    Why don’t they come out and say what they really mean. Doctors will not service a patient unless the patient and insurance company or government pay the full up price that he doctor is asking. If not the full price then the patient can go elsewhere.
    Somewhere out there in the American way of competitive pricing IS a doctor who will work for what the economy will bear. Right now the AMA tells congress what they want and they get it.

    • The comments by “S A Mor*” have no basis in reality. The article means exactly what is says. Medicare pays doctors 20% below private insurance rates; not what doctors bill. To cut Medicare payment rates by another 25% would bring these rates to 40% below private insurance rates.

      Rates that are 40% below private insurance are far below what the market will bear, as shown by the facts documented at this link provided in the article: http://www.justfacts.com/healthcare.asp#medicaid_payment_rates. These facts show that Medicaid pays doctors 42% below private insurance rates, and because of this, many doctors are unwilling to see Medicaid patients. The result is that Medicaid patients have severe problems with access to care.

      James D. Agresti | President | Just Facts

  2. I find it hard to believe that competitive pricing is truly the solution for healthcare provision. Given the costs of medical insurance and other fees that doctors must pay in order to protect themselves from frivolous lawsuits, doctors more than likely won’t be able to afford to keep taking on charity-cases on a regular basis. (It may sound harsh to call folks a charity case, but when you’re getting paid half-price…). But beyond that, people have the right to charge what they think is fair for their services. If a doctor was truly “overpricing”, insurance companies would not agree to cover the full price asked by a physician. Sounds like Uncle Sam is just being cheap. But I guess you have to with so many folks using Medicaid.

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