21% of GDP: taxes v. health reform

Warren Buffet has a piece to today’s NYT calling for higher taxes and disputing the notion that this will reduce investment. Matt Miller (@mattmillernow) noted this morning via twitter that the most consequential aspect of Buffet’s piece is his call for federal spending to be capped at 21% of GDP.


I understand the percentage of GDP to be redistributed via government to be the most consequential public policy issue of our day. In my book Balancing the Budget is a Progressive Priority I also adopted 21% of GDP as a  target for capping federal spending, but noted that it would take very aggressive health care reform beyond what we now have (21% of GDP is suggested by the Simpson-Bowles commission as a balance budget point to be achieved around 2035). Miller is correct that in the 1970s and 1980s we routinely spent ~22% of GDP and the baby boomers were paying taxes then, not moving into Medicare, Medicaid and Social Security. So, 21% is very aggressive and will be hard, but I worry that higher levels of federal spending over the long term will harm economic growth.

However, it we cannot reduce health care spending enough to hold to 21% of GDP as a federal spending cap, then we need higher taxes to pay for our spending.

The key variable in playing the percentage of GDP collected in taxes up or down is what you are willing and able to do in the way of health reform. It is much easier (technically) to come up with a tax system that brings in 22 or 23% of GDP in taxes than it is to devise the health reform efforts necessary to constrain spending at 21% or certainly something lower given the reality of the baby boomers. The politics of both are hard, and I am unsure of which is harder, but the two questions should be explicitly linked. I don’t believe the most important barriers to constraining the growth in health spending to be technical, but instead cultural; by that I mean what the population (the 308 Million version of we) will tolerate. I think we need to move toward a cultural conversation that flows into explicit health policy that systematically asks the questions: does this extend life? does it improve quality of life? how much does it cost? Only with that information and the will to use it could we decide whether something “was worth it.”

And if the public decides we can’t face these questions with policy responses that allow us to spend 21% of GDP, then I suggest not scheduled cuts if targets aren’t achieved, but scheduled tax increases. Essentially a tax based fail safe. This will allow us to decide if we are willing to undertake health care cost per benefit policy necessary to have federal spending be 21% of GDP, and if we are not, we will be given a chance to pay for it.

cross posted at freeforall

Author: Don Taylor

Don Taylor is an Associate Professor of Public Policy at Duke University, where his teaching and research focuses on health policy, with a focus on Medicare generally, and on hospice and palliative care, specifically. He increasingly works at the intersection of health policy and the federal budget. Past research topics have included health workforce and the economics of smoking. He began blogging in June 2009 and wrote columns on health reform for the Raleigh, (N.C.) News and Observer. He blogged at The Incidental Economist from March 2011 to March 2012. He is the author of a book, Balancing the Budget is a Progressive Priority that will be published by Springer in May 2012.

27 thoughts on “21% of GDP: taxes v. health reform”

  1. “I think we need to move toward a cultural conversation that flows into explicit health policy that systematically asks the questions: does this extend life? does it improve quality of life? how much does it cost? Only with that information and the will to use it could we decide whether something “was worth it.””

    The anti-ACA rhetoric around “death panels” may have been overheated and may have been misleading, but the blanket dismissal of the very real concerns behind such rhetoric is belied by precisely the argument that closes this post. Healthcare costs are growing at a rapid rate – faster than the resources available to pay for healthcare. Whether this is a crisis now, or becomes a crisis 5, 10, 20 years in the future is beside the point – an open-ended commitment on the part of the government to pay for a good whose cost grows much faster than the rate of economic growth is unsustainable. And thus at some point there will be enormous pressure to ration certain types of care.

    Conservatives suspicious of the ACA generally distrust un-elected bureaucrats (whether or not such bureaucrats are clothed in warm-n-fuzzy sounding rhetoric about a “cultural conversation”) to make these decisions. Just as liberals were generally distrusted health insurance executives to make these decisions in those heady days of mid-to-late 1990s anti-HMO hysteria.

    Get 100 people together and probably 80 or 90 would agree that its foolish to spend hundreds of thousands of dollars to keep someone alive on a ventilator, in a coma, with no prospect of recovery, or to spend hundreds of thousands of dollars on a complete long-shot course of experimental cancer therapy for a 70 year old patient whose standard chemo and radiation have already failed. OK – those “easy” calls can delay the day of fiscal reckoning for a bit. But at some point we run out of such cut-and-dried decisions and have to tackle ones like “should we intervene to try to save the life of an infant born at 20 or 21 weeks gestation? Should we provide a heart transplant for a 30 year old with Down’s Syndrome? Should we spend hundreds of thousands of dollars on an experimental cancer treatment (expected odds of success – 15%) for a 55 year old with one child still at home whose standard chemo and radiation have already failed?

    These are very difficult decisions. Much of the health policy debate is really about the tradeoff between having these decisions made by a public sector body that has no profit motive but is inherently centralized and captive to the power of the political system, vs. having them made by private sector bodies that have a profit motive but that are decentralized and largely independent of the political system. I respect the opinions of people on both sides of the issue – but I don’t respect the opinions of people who, for the sake of bolstering “their side” of the argument deny that there is, indeed, a tradeoff (i.e. that there are strengths and weaknesses of both approaches).

    1. “Much of the health policy debate is really about the tradeoff between…etc.”

      This is because health policy debate is really health insurance policy debate.

      There are three interrelated problems in our health care: (a) The high cost of items and services, (b) the effective and efficient use of health care resources, and (c) the problem of health insurance for any but the wealthy. All the yadayadayada we endure, all the political posturing, all the brouhaha about every proposal made and every policy implemented … they are all simply about problem (c). We have had few if any meaningful attempts to address problems (a) and (b), and consequently problem (c) keeps escalating at an alarming rate.

      Now, having oversimplified, I point out there is a meaningful exception. When the payers are united in a large consortium (Blue Cross/Blue Shield, for example) they can exert a meaningful force to mitigate problem (a). It was good to have comprehensive health insurance while I was working, but one of the most important aspects of it was that providers “in the network” accepted payments that were significantly less than “full retail.” Likewise, now that I am covered by Medicare, I find that the “bill” that the providers issue is significantly higher than the payment they accept. The consortium has leverage that the individual does not. The “efficiency of the marketplace” is total b.s. You need a powerful union.

      What’s mind-boggling, though, is that my Medicare drug insurance pays full retail. That’s absolutely insane. Congress, in their infinite stupidity, has decreed that our Government can’t use its leverage to get a better deal. And that idiocy is magnified by the example of the VA, a government agency which DOES get a better deal.

      Anyway, we have barely scratched the surface of what we could be doing about problem (a), and with the pay-for-service model we have in our “free marketplace” medical care, we haven’t even attempted to address problem (b). So let’s be realistic, and recognize that most of what we talk about is “health insurance policy.”

    2. There is no easy way to spend less on health care than what we are now projected to spend over the next 30, 40 years, etc. There is a blind spot in persons who want “market” forces to ration versus those who want “insulated from profit forces” to do so. Only by delivering less care per capita, and/or paying less for care on a per capita basis can we spend less than project. Either will be hard to achieve. Again, whether market or IPAB, etc. (though IPAB now can only cut payment rates).

  2. I call bullshit.

    In a system with shared federal/state responsibility, with mandates and nominally dedicated taxes, any particular number for federal spending as a percentage of GDP is a crock. It will always be easier to hit some particular target by shifting definitions or creating off-balance-sheet entities than by making some particular set of tactical treatment tradeoffs. And unless we’re going to outlaw financial panics and recessions, it’s more sensible

  3. Will Don please explain why >21% (or any other number) of federal spending as GDP will restrain growth? I can see how the nature of the spending would effect on growth, but the spending itself?

    If the spending merely replaces “private” spending (e.g., much healthcare), it should have no first-order effect on growth. Second-order effects might be there, but they’re uncertain. Remember that in health care, the more governmentalized the system, the more efficient it tends to be. This is based on x-country comparisons, but is true even in the good ole US of A–the VA system is very efficient.

    If governmental spending displaces private spending, allocating it to different things, there will be a first-order effect on growth. But it could go either way. Let’s say, for example, that the government puts an excise tax on the erection of new business school edifices, and uses the revenues to–I don’t know, let’s say–pay for more and better urban teachers. What effect on growth? When? Or let’s say that the government institutes a carbon tax, and uses the revenues to stimulate demand in alternative technologies. What effect again? Or let’s say that the government zeros out spending on the court system. What effect on growth? Etc.

    1. I meant if we pick a level of fed govt spending, it implies what type of health reform is needed. So, if Paul Ryan wants balance at 19% of GDP, it will take profoundly different health care system over next 30 years or so than the one we will have by default. If you go with Center for American Progress plan for balance at ~23% of GDP, it takes much less aggressive health care system. The 21% (or any other target) is best thought of as an average and as is said above, during recessions, econ emergencies it won’t be that level. Your point about different compositions of spending that resulted in 21% of GDP would have differential impacts on economic growth is a fair one.

      1. I don’t think the level of federal spending means anything. Conservative economic theory that we all go to hell if we have a bigger government are wrong. Were it true, Scandinavia would be a hellhole.

        That said, even if you disagree, the theory would make no distinction between local, state, and federal spending. The level of federal spending alone means nothing.

  4. I made here a rather off-the-wall argument that the amazing health of European royalty – and from the outside, their low health expenditure – provides a ray of hope that a Struldbrug future of ever-increasing health costs or ever more severe rationing is not the only scenario. I wasn´t refuted.

    Don worries that ¨higher levels of federal spending over the long term will harm economic growth¨. A major aspect of overall welfare that GDP fails to capture is of course health. Consider a tradeoff between an extra $50,000 to spend now and an assurance of palliative care in one´s last days. Brad deLong bangs on about better health care being a sensible way to cash economic progress. (Not of course higher salaries for health insurance CEOs and plastic surgeons.)

    Why should the USA worry about public expenditure rising to say Swiss levels? There is the constitutional difficulty that this would be federal spending, shifting the balance away from the states. If it weren´t for the old Confederacy, Swiss-type decentralisation would be compatible with a welfare state. There´s no solution in sight for this. Texas is not being Finlandised.

    1. I think that this is a really good point. As long as there is such a disparity in the ways that states (want to) treat the meat-persons within their borders, there is always going to be a significant role for the federal government in attempting to equalize the situation. And it’s much easier to fulfill that role by methods that increase federal expenditures than by ones that decrease them.

      1. I think that this is a bit more complicated, although ultimately I agree with Paul.

        The problem is not per se in the disparity between state treatment of meat-persons. If Texas wants to teach Talibanic science in its schools, so much the worse for Texas. The ultimate equilibrium will be the Kansification of Texas: vast open spaces with nobody wanting to live there. Fine by me! I don’t see the need for federal intervention here, at least on economic grounds. (Let’s put the Establishment Clause aside for a moment.) Or similarly, I don’t see why the Federal government needs to force Mississippi to abandon its low-wage approach to economic development in favor of a more rational encouragement of an entrepot infrastructure. It’s Mississippi’s bed; let them lie in it. (Again, let’s put the 13th Amendment aside for a moment.)

        The problem is in the disparity between state treatment of poor-persons. Like obesity, childhood poverty tends to be life-long. Poverty is expensive. Texas tries to export its poverty by maltreating its poor, encouraging them to go elsewhere. The export is the externality that calls for federal intervention, both in forcing Texas to lower its poverty rate, and in forcing Texas to pay the current costs of its poor.

        1. I agree with a lot of what you say, except to note that it is probable that in Texas, as in California, a lot of those poor are undocumented, which in my book sort of makes them at least partly a federal responsibility. Maybe mostly. And I am not in favor of mass deportation or anything like that.

  5. PS: I think I´ve made this point before, but ¨government spending¨ does not mean ¨redistribution¨. Government-provided services – defence, research, schools, parks, FEMA, VA hospitals – are part of the national product table. Taxpayers are forced to buy these services, but this isn´t redistribution in the ordinary sense. Transfers – redistribution in the true sense – are part of the national income table: Social Security, Medicare, Medicaid, food stamps. Adding the two, as in commonly done, is adding apples and cheese. Since national health care in the US is almost entirely a transfer system with private providers (which wil show up in the private sector in the product table), the growth is almost all in that side. But the baseline isn´t 21%.

    1. I actually think of govt spending as inherently redistributional in nature. If not, then there has to be some tax collected and returned exactly as levied. I don’t think redistribution is bad, just a fact. Even (or perhaps especially) military spending is redistributional in nature….I grew up in a rural dying town with an Air Force Base, so the notion of base closings greatly threatened our town. I agree that different types of spending are viewed differently.

      1. I think federally funded Judge Thomas Griesa is practicing redistribution. Just not in the direction that Don Taylor apparently thinks always holds.

    2. Hey. A slice of really good warm apple pie with a slice of sharp cheddar melting on it is one reasonable definition of heaven.

      Oh… we aren’t talking about cuisine?

      Never mind.

    3. As long as you’ve got a “progressive” tax system, “government spending” does indeed mean “redistribution”; You’re deliberately getting the money from one set of people, and spending it on a different set. If that’s not redistribution, what is?

      1. Consider a nation funded by a fixed percentage VAT and employing only tax collectors and a robust Department of Offense. This is of course somewhat down the road to a libertarian paradise. The Department of Offense requires modern weapons, these are supplied by Capitalist Tools, who need to be remunerated in proportion to their Command of Capital, which is, of course, their Special Genius.

        In this regressively funded society, mass redistribution occurs, from mainly the middle class (that’s where the money is) to the suppliers of the Department of Offense. To the extent the economy tilts materially toward supplying the tools for the Offense monopsony, that’s an explicitly induced market distortion.

        Notice that the whether or not the tax code is regressive or progressive, and whether or not the function of Government is just to provide Offense (and funding infrastructure), or other things, redistribution occurs.

        “You’re deliberately getting the money from one set of people, and spending it on a different set. If that’s not redistribution, what is?”


        1. If the government is Medici Florence, it´s raising taxes (tolls?) on poorish citizens and spending it on Michaelangelo, Ghiberti and Brunelleschi, very expensive star artists. So it redistributes regresively by its spending pattern. Modern OECD governments don´t have any employees, and very few contractors, paid anything like bond traders, so the US federal government spends more progressively than it taxes. Can Brett explain why this is a bug not a feature? (I only concede that government may redistribute to the extent its spending and taxation patterns differ, not that taxation for services is inherently redistributive.)

          This differential may not hold for state and local governments. Typical employees (teachers and cops) may well be better paid than the median payer of a sales tax, though property taxes are progressive.

  6. The totality of Warren Buffet’s genuis isn’t that he’s supremely talented at business & finance, it’s that he’s also supremely talented in another, completely unrelated field. I’m referring to his stunning performance piece as an Aw-schucks-I’m-just-a-regular-guy-I-could-be-your-neighbor everyman. The subtext to which is, So you can trust me because I’m just like you.

    Um, no. I didn’t read his column at breakfast today and I’m not going to read it now. I’m in no position to evaluate his math but I’m pretty sure that whatever he proposes is going to be a lot better for him than it is for me and my family.

    1. Actually, among the uber-wealthy, Buffet’s is one of the few voices worth hearing.

      He is the one who pointed out that his secretary pays a higher effective tax rate on her income than he, and that he thinks that is unfair.

    2. I looks like you might be “pretty sure” of something you’re not well-informed on. You should read the Wikipedia article about Buffett, focusing particularly on the section titled “Philanthropy.” This is a man who believes the best use of most of his money is to do good for other people.

      1. “This is a man who believes the best use of most of his money is to do good for other people.”

        Good on him. It’s when he starts to advocate for the best use of other people’s money that we part ways.

    3. Is Buffet’s rhetoric highly preferable to that of his economic peers the Koch brothers — yes, of course (would that he gave anywhere as much money to Democratic candidates as the Kochs give to the Tea Party). That I like the content of his schtick doesn’t make him more trustworthy to me however.

      Is it nice to give money to charity — yes, of course but please remember that there is a very strong argument that the Gates Foundation (Buffet’s main beneficiary) is actually doing tremendous harm to public education (Diane Ravitch is probably the source on this topic that is easiest to access if you are interested in more information).

      I did finally read this op-ed, and also slogged through a good number of the hundreds of comments. When Buffet talks about tax rates on “income,” is he referring to “salary and wages”? Most of the annual increase in what he owns does not come from salary and wages, it comes from capital gains. Did he mention increasing the capital gains rate in his piece? I didn’t see it but I am open to correction.

      The main thing I am reacting to is his idea that government spending on the sorts of programs that help the rest of us have better lives — what Matt Miller calls the “progressive nonelderly agenda” — be limited to a certain amount. I’m with Dilan Esper on this, I’m not buying that we all go to hell if government spending goes over 21% of GDP.

  7. I’m with Paul, a 21% of GDP figure is easy to manipulate and hard to justify based on needs and available services. Redistribution is such a loaded political term these days anyway in what it implies about taking from the rich and “giving” to the poor. Why not consider it a reallocation from one sector (e.g. financial) and giving to another (e.g. highly educated professionals and sophisticated manufacturing enterprises). Isn’t that something we can all favor?

  8. “There is no easy way to spend less on health care…” Bullshit. About $200B/yr goes to excess overhead caused by the messed up private insurance system. This isn’t the majority of our excess costs, but it’s a huge piece. Moving toward the national systems used by every other advanced country would clear up that huge expense, over 1% of GDP in itself. Other savings require more effort.

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