The Fallacy of Causation and Solution

This post from Kevin Drum is a good example of one of the fallacies that seems to be making the rounds these days.  In the body of a typical argument about why Republicans are unserious on the deficit (true for most in my view), Kevin makes the following argument.

It's all healthcare, baby. If all of the pressure on the deficit were being applied to serious proposals for reining in healthcare spending, in an effort to get U.S. spending levels down to those prevailing in socialist Europe, I'd probably applaud. 

So the solution to the deficit is all about healthcare.  You can see similar arguments popping up all over the left blogosphere.  Mostly, as in this case, these are arguments for universal health care but leave that aside.  The point is that they represent a fallacy, the fallacy that if A is the cause of a problem then a change in A must be the solution.  Certainly we can look at changing A (health care) but there's no particular reason that changes in A must be the answer.

To make the point, let's take a look at taxes and spending relative to 2000 (the last time the budget was balanced).  I'm going to look at this in two ways.  First, I'm going to look at effective tax rates across the income distribution (similar to my previous post comparing to 1979).  Using the same TPC and CBO assessments, one gets the following picture.

So, relative to the last time we had a surplus, effective federal tax rates in 2013 are projected to be lower for every income group except for the top 1% where rates are projected to be 3.4 percentage points higher than they were in 2000.

By the Kevin Drum logic, I should therefore cut the tax rates of the top 1% and increase the tax rates of everyone else since that would be the way to correct the problem by addressing the changes that led to the problem in the first place.  I rather doubt that Mr. Drum or his intellectual comrades would be in favor of this approach.

We can of course extend this thinking by looking at the spending side of the equation.  In 2000, spending on domestic discretionary programs was 3.0 percent of GDP.  In 2011 (2012 is not yet available), these same programs consumed 4.3% of GDP.  Should we therefore cut these programs by 30% in nominal dollars?  I rather doubt this is the plan that would be embraced by Mr. Drum.  Indeed we know this is not the case since "It's all healthcare, baby."

The point here is not to argue that addressing healthcare isn't an important part of our long term deficit picture but rather to argue the fact that healthcare spending has increased and will continue to do so does not imply that the only (or primary) solution is to reduce or slow the rate of growth of health care spending.  The prescription may or may not be right, the logic is not.

A Long Reply to Peter Orzag

Well, I don't get to post in the Washington Post but I do want to reply to Mr. Orzag's most recent column there.  Warning to all, this is going to be a long post as his is a long column with quite a lot of misrepresentations.

First, federal Medicaid spending is currently forecast to double by 2040, from 2 percent of gross domestic product to 4 percent. Under Ryan’s budget, it is projected to be cut in half over that period. This dramatic turnaround will supposedly occur by turning Medicaid over to the states through block grants. Anyone want to bet that will work? If states can’t find huge efficiencies in Medicaid, expect them to pressure the federal government to avoid the fanciful reductions in federal support assumed in the Ryan budget.

It's kind of interesting really.  This is nothing more than an argument that Mr. Orzag believes that Medicaid cannot survive on 3% per year increases in funding (which is what is in the Ryan budget) from the current baseline.  Mr. Orzag is entitled to his opinion and he may prove to be right but this hardly proves anything.  As I've written elsewhere, assuming the end to our slow growth period, as all forecasters have and assuming 1% annual efficiency in Medicaid spending, 3% growth in Medicaid is not a bad forecast over the next decade.  In the longer run, it may be worse but this is hardly the ridiculous assumption that Mr. Orzag assumes it to be.

Second, the Wisconsin congressman has specified $4.5 trillion in tax cuts, counting on massive rollbacks of tax breaks — such as the mortgage interest deduction — to pay for them. But he offers no details as to how to achieve such reductions, and most serious tax analysts don’t think such changes are politically feasible.

Let's assume this is true.  Mr. Ryan and Mr. Romney have specific two objectives, rolling back rates 20% and cutting deductions to offset.  My Orzag is making the assumption that the first objective will trump the second if they are in conflict.  He has no way of knowing this is true and, the projections in the Ryan budget actually appear to assume the first trumps the second sine the revenue line is revenue neutral to the current policy baseline.  Again, Mr. Orzag is offering no proof just the least charitable read he can offer.

Third, Ryan assumes that other spending, including nondefense discretionary spending, will fall from more than 12 percent of GDP last year to less than 5 percentby 2040. Again, he provides scant details on how to get there. 

This one is actually a bit funny.  Mr Orzag may want to read the President's budget at some point.  It assumes that total discretionary spending will fall to 5.0% of GDP by 2022.  The notion that Mr. Ryan might go from 5 percent to below 5% by 2040 doesn't really seem all that difficult to imagine.  You'd think as a past member of the Obama administration, Mr. Orzag might be aware of this fact.

Ryan says he would cut tax rates for all families, but that doesn’t mean the middle class would be any better off. Even after the Bush tax cuts, Ryan’s reductions would amount toabout $1,000 a year for families with annual incomes between $50,000 and $75,000— compared with a cut of more than $250,000 a year for those with incomes above $1 million.

This one is fun with numbers.  According to the TPC, the average family with an income of between $50,000 and $75,000 pays 5.7 percent of their income in federal income taxes (which is what is being changed here).  We'll charitably call that about $3500 per year.  This family is receiving a tax reduction of about one third, using Mr. Orzag's own estimate (which comes from the partisan CBPP).  The family with over $1,000,000 on average pays an average of about $600,000 in federal income taxes and receives about the same 1/3 reduction.  Thus, the gap in the amount saved is caused not by the unfair change in the tax code but by the gap in their current tax contributions.  As an aside, the tax rate changes in the Ryan plan do nothing to tax distribution.  It's simple math.

Furthermore, unlike the proposal from the nonpartisan Domenici-Rivlin deficit-reduction commission, the Ryan budget does not include any provisions to create jobs immediately. With unemployment above 8 percent, we should couple any long-term deficit reduction with additional support for the economy today. That would help the middle class more than promises of a tax cut that will probably turn out to be a mirage.

Oh dear.  So the Ryan plan is like the bipartisan Bowles Simpson plan in that it doesn't include immediate stimulus.  It is interesting that Mr. Orzag wouldn't mention the Bowles Simpson plan which his boss created.  With the deficit above $1 trillion already, perhaps Mr. Orzag should explain why the next trillion of deficits will do more than the first trillion. I'd also be curious if Mr Orzag would support all of Domenici Rivlin which, quite interestingly calls the same approach to Medicare as in the Wyden-Ryan plan (the current incarnation of Ryan's approach to Medicare).

“Both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare,”the report said. That effect, according to the CBO, would outweigh any savings achieved by people choosing less costly health care.

But this assumption from the CBO is achieved by assuming that Medicare can continue to cost shift onto private insurance in perpetuity (which of course it cannot) and Mr Orzag also fails to mention that the plan would save the government a ton of money which the CBO concludes in the same report he cites.

Suffice it to say this piece which appears under the title "Five Myths About Paul Ryan's Budget" should probably be titled "5 Reasons Peter Orzag Has a Difference of Opinion with Paul Ryan."  To classify something as a myth typically requires demonstrating it is not true.  Mr. Orzag falls a long way short of that bar.

When Smart People Go Stupid

I don't often agree with Ezra Klein but usually I think he's fairly good on his facts if not his interpretation.  But this is far away from his best work

Passage of the Affordable Care Act last year brought us closer in line with our international peers. But not much closer. And consider the costs we continue to impose on ourselves in the interim: If the United States simply had the per-person health-care costs of Switzerland, which has the second-most expensive health-care system in the world, we would spend $3,000 less per person and save about $900 billion a year. Assuming we need to reduce deficits by about $4 trillion over the next 10 years, those savings would do the heavy lifting with about $5 trillion to spare.

Now, let's back up here and think about this.