Government Spending

And the Federal Budget Will Be 100 Percent of GDP

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In testimony before the Senate Budget Committee yesterday, Congressional Budget Office Director Peter Orszag said spending on Medicare and Medicaid will represent one-fifth of the gross domestic product in 2050 if it continues to grow at the same rate it has during the last four decades. That's "roughly the share of the economy now accounted for by the entire federal budget." While the aging of the population and the imminent retirement of the baby boomers will contribute to this dramatic increase, Orszag said, "the rate at which health care costs grow relative to income"—i.e., the fact that medical spending per patient has been rising about 2.5 percentage points faster than per capita GDP each year—"is the most important determinant of the long-term fiscal balance."

For this Orszag blamed, among other things, spending on new, more expensive treatments that are not always cost-effective, partly because doctors have a strong incentive to sell more services and patients have little reason to be cost-conscious. He also mentioned the various ways in which Americans fail to be as healthy as they could be, including smoking and overeating. But he implicitly conceded that the government would not necessarily save money if everyone were thin and smoke-free. "Although proposals that encourage more prevention and healthy living can help to promote better health outcomes," he said, "their effects on federal and total health spending are uncertain."

Why? Partly because living longer means more health care in old age (not to mention more demands on Social Security), so the net effect might actually be higher government spending. That appears to be the case with smoking, and it may be true of obesity as well. I have yet to see an analysis that looks at the total fiscal impact of eliminating obesity, as opposed to toting up the costs of treating diseases associated with high BMIs (many of which may actually be due to poor diet and/or lack of exercise, as opposed to excessive weight per se). I don't agree that every American has a duty to the state to eschew all risky habits because of their possible impact on the public treasury. But those who make this argument should at least be able to show that eliminating a particular risk factor would in fact improve the fiscal situation.

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  1. I’d be interested to see archival articles from publications that opposed Medicare and Medicaid before they began.

    We need to track down whoever wrote articles saying that priming the demand side of health care would set up an endless feedback loop of medical cost inflation – so we can give them an award.

  2. Nonsmokers have higher medical costs in old age than smokers, because more of them live to old age. That says nothing about their medical costs in the last month, year, and decade of their lives, or about their lifetime medical costs.

    It also doesn’t take into account their decreased wealth contribution (whether we’re talking about taxes or actual wealth created by their working lives).

  3. From one point of view, the ideal citizen is a highly-paid executive that generates lot’s of wealth right up until the point of a sudden fatal heart attack.

    I don’t understand why the government isn’t off promoting extensive use of trans-fats and other ticking-bombs (from a cardio perspective).

  4. “From one point of view, the ideal citizen is a highly-paid executive that generates lot’s of wealth right up until the point of a sudden fatal heart attack.

    I don’t understand why the government isn’t off promoting extensive use of trans-fats and other ticking-bombs (from a cardio perspective).”

    Because:

    1) The goal of the federal bureaucracy is survival and growth — anything that brings in more money is good in their eyes.

    2) They have to appear to care about us in order to get enough of us to quietly submit to paying taxes and not taking up arms.

  5. It also doesn’t take into account their decreased wealth contribution (whether we’re talking about taxes or actual wealth created by their working lives).

    Cigarette smokers pay more than their share of taxes. And lets keep the cart behind the horse here. Does cigerette smoking make people less wealthy or are less wealthy people more likely to smoke? I’ve seen reputable studies (no, I can’t remember which ones) which indicate that smokers, as a group, contribute extra taxes that exceeds what extra benefits they as a group consume. Drinkers, as a group, less.

  6. This is why I believe that research into repairing the damage caused by aging would pay for itself many times over. Adding 20 years to the end of someone’s life probably results in substantially higher medical costs. Adding 20 years to the middle would result in both lower costs and much improved quality of life.

  7. Won’t medical costs plummet once all the new expensive drugs start going off-patent? Same with new procedures and testing equipment; isn’t their the factor of economics of scale to look at? MRIs are pretty damn expensive still, but as more and more MRI clinics open, the price for building and maintaining them has to go down. Maybe that’s not the best example, but I think we are at a peak in terms of medical innovation, and new innovations are going to be marginal at best compared to what we have now and will have in the very near future.

  8. jf,

    We haven’t peaked till we have bone knitters, hyposprays, and cortical stimulators. Period.

  9. Oh yeah, and biofilters for the transporters. That’ll be a big help.

  10. Drinkers, as a group, less.

    A new excuse for my drinking problem!

  11. Hyposprays have been around for a while.

  12. Partly because living longer means more health care in old age (not to mention more demands on Social Security), so the net effect might actually be higher government spending.

    “Might?”

    Think about a person with a bachelor’s degree at 22 and healthy enough to live to 105:

    Working and paying taxes–40 years
    Social Security–43 years
    Medicare–40 years
    Medicaid (after going into long term care at 90)–15 years

    He would spend as much time on medicare as he worked and contributed, and more time drawing SS than he spent working for it.

  13. jf,

    Great, now I have to worry about accidental jet injection. As if I needed that. 😉

  14. The best way to improve the fiscal situation is to make weaklings (fat-fuck layabouts, smokers, and nut jobs who don’t wear seat belts, for starters) pay for their own health care. Charities could cover the funeral costs.

  15. Working and paying taxes–40 years
    Social Security–43 years
    Medicare–40 years
    Medicaid (after going into long term care at 90)–15 years

    Income is not the only thing you pay taxes on, thus retirees do continue to pay tax. They pay capital gains taxes, dividend taxes, property and sales taxes to their local jurisdictions, and can continue to pay tax on, for instance, annuitized income streams they’ve established with their lifetime savings.

    This is not to say the numbers are not still skewed to the negative, but you don’t just suddenly cease contributing to the state the day you get that gold watch and move to Boyton Beach.

  16. The best way to improve the fiscal situation is to make weaklings (fat-fuck layabouts, smokers, and nut jobs who don’t wear seat belts, for starters) pay for their own health care. Charities could cover the funeral costs

    That’s only part of the solution. Add everbody else onto the list of who has to pay their own freeight on the health care train. Gov’t outlay problem solved.

  17. Income is not the only thing you pay taxes on, thus retirees do continue to pay tax.

    True, somewhat. Do you pay SS/Medicare tax on dividend income? I’m not sure. You don’t on allready-taxed IRAs. And almost everyone going into long-term care is forced to sell off nearly everything they own, so no taxes the last fifteen years.

    Besides, my main point was that healthy people could spend over half their adult life collecting major benefits.

  18. True, somewhat. Do you pay SS/Medicare tax on dividend income? I’m not sure.

    No, you only pay it on earned income. However, if your taxable yearly income is over a certain amount, part of your Social Security benefits are taxable. Not only that, but if your yearly income is high enough, you lose your personal income tax exemption.

  19. Why stop at 100% of GDP?

    I’m out, man. O’Canada, here I come…

  20. Isn’t this the point at which someone is supposed to say, “I fucking hate Boomers!” or something similarly thoughtful and enlightening?

  21. That says nothing about their medical costs in the last month, year, and decade of their lives, or about their lifetime medical costs.

    The vast majority of your lifetime health costs are incurred in the last year of your life.

    Smokers tend to die quick, and I’m pretty sure their lifetime and end-of-life health care costs are lower than non-smokers. Not to mention dying young cuts down on their Soc Sec take.

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