The Deficit- Creating our Own Nightmare

Listening to politicians in Washington, there is no doubt that America's huge deficit is leading to the end of the world as we know it. They never fail to describe in horror the effects of ballooning government spending on the future of our children.

Here's the problem. It ain't that bad.

According to the nation's official budget scorekeeper, the nonpartisan Congressional Budget Office, if politicians simply do nothing, the deficit will fall from today's 8.5% in 2010 to 1.2% in 2021. The historical average from 1971 to 2007 was 2.8%.

So what's the catch? Real simple. Congressional leaders are simply unable to let the current tax cuts expire. Allowing taxes to rise to their pre-2001 level in late 2012 would drop the deficit to less than half their historical average. Don't let the pre-2001 tax level scare you, taxes as a percentage of GDP were below the post-war average in the late 90s, the budget was balanced and the economy was roaring.

That doesn't mean we pull the trigger if the economy is still growing slowly and it doesn't mean that we don't still have work to do on the budget.

What it does mean is that current hyperbole is simply out of control.

The Myth of Overuse: Health Care Co-payments

There are few things people agree on when it comes to health care reform but one of them is the importance of provider co-pays in reducing health care costs. Liberals and conservatives alike delight on the ability of this simple device to reduce overuse of health care resources. Businesses and governments who fund health care payments enjoy the cost savings of co-pays while benefiting from the warm glow of serving the greater good of health care reform and cost containment.

The assumption is that health care consumers make a trade-off between the price of the care and its true benefits. This usual policy logic dictates that we use elasticity of demand (the change in quantity demanded divided by the change in price) for a category of care to set co-payments. The data indicates a high demand elasticity meaning that the care is of low value. If a small change in price results in less use, than the value of the care must not be very high.

But what if that isn't how people make decisions? What if people have biases in judging in making decisions? A particular difficulty with medical procedures is that many people tend to judge them much worse before than after the procedure. Their fear of the procedure makes them subject a bias again the care that is confirmed by the co-pay. People suffer from a great deal of confusion and anxiety when making health care decisions.

What if people aren't very good had judging the medical risks of various procedures? Could people myopically discount adverse health outcomes?

There is disturbing evidence that small changes in co-pays have huge effects utilization.

While there everyone agrees that co-pays create lower utilization rates, the important question is, do co-pays end up limiting overconsumption of medical care or does it lead to underconsumption of medical care. Do patients reduce the amount of care they purchase based on inaccurate assumptions of risk thus leading to higher long term costs for consumers as well as higher social costs for society?

This is particularly likely to be true in the case of low-income patients. A $50 co-pay may reduce overconsumption by high income patients while creating underconsumption for low income patient.

There are alternatives to simple using a meat ax on health care. Differential pricing could be valuable in this process. One idea would be to increase the co-pay as the number of visits increase. Another would be to set the co-pay as a percentage of income. Co-pays may just be another excuse to cut services to those of us who are less well off.

The Media and Confidence

This morning's Seattle Times headline screamed "Greek Debt Vote Rocks Markets" . The article went on to proclaim that "U.S. stocks plunged as investors fretted that Europe's problems, believed largely resolved, now appear far from settled and threaten a week recovery." The Dow Jones fell nearly 300 points.

Today, the market has already made up over 2/3 of yesterday's loss buoyed by good news of private sector job creation.

Hmmm. Do you think that the uptick will make the Times headline? Did the Times headline last week's good news on GDP growth?

The point is that people tend to take in news with the emotional part of the brain not the rational part. The constant outflow of bad news accumulate into declining consumer confidence. Any good news is generally off the media radar screen.

In reality, a recovery is very slowly building and markets have been relatively stable on a monthly basis over the past year. But consumer confidence has lagged. We are mere mortals who forecast the future primarily on the mood of today, when things are good, they are good forever. When they are bad, they are bad forever. The Seattle Times is merely doing it's job, but the effect is to tamp down consumer confidence.