Voodoo Cost Savings in the Baucus Bill

From The Baseline Scenario(Simon Johnson):

If you really want to know about Max Baucus’s bill, head on over to Ezra Klein’s blog, which is all Baucus, all day. If you want to complain about fake cost-saving measures, stay here.

A major selling point of the Baucus bill (can’t really call it the Group of Six bill with zero Republican support; can’t call it the Democratic bill with questionable Democratic support), at least in the media, is its lower cost – $860 billion according to Baucus, $770 billion according to the CBO. This compares to the $1 trillion cost of the House bill. But this is a meaningless number, for two reasons.

The first is that this is just the cost side; it doesn’t take into account how those expenses are financed. The House bill has a net cost of $239 billion, not $1 trillion; why everyone focuses on the $1 trillion number while talking ominously about government deficits makes no sense to me. So if you really want to be selling the Baucus bill, you should be pointing to the $49 billion that the CBO says the bill will save the government over the next ten years.

The second is that the cost number is an accounting fiction. One reason the Baucus bill is “cheaper” than the House bill is that it has lower subsidies. For illustration, let’s assume that the whole $140 billion difference is due to lower subsidies. Relative to the House bill, then, the Baucus bill costs the government $140 billion less; but it costs middle-income people exactly $140 billion more, since they have to buy health insurance. The difference is that in the House bill, the money comes from taxes on the very rich; in the Baucus bill, it comes out of the pockets of the middle-class people who are getting smaller subsidies. Put another way, the Baucus bill is the House bill, plus a $140 billion tax on people making around $40-80,000 per year. That’ s not only stupid policy; it’s stupid politics.

In reality, there are more differences between the bills than just that, and, in its defense, the Baucus bill seems to raise more revenue than the House bill. But this idea that reducing subsidies saves money is just an illusion created by selecting a particular frame of reference. If you start with a different frame of reference, reducing subsidies is just increasing taxes – on the wrong people.

By James Kwak
http://baselinescenario.com/2009/09/16/voodoo-cost-savings/