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Archive for December 1st, 2010

The Chairmen of President Obama’s Fiscal Commission have a new draft proposal that is filled, according to Reuters, with “sharp spending and benefit cuts.”

That’s music to my ears, so I quickly flipped to the back of the report in hopes of finding hard numbers showing that the federal government will be smaller in future years.

Much to my chagrin, it turns out that the federal government will increase by about $1.5 trillion between 2010 and 2020 according to the Commission’s numbers. Here’s a chart based on the data from page 57.

As I explained in the video below, this disconnect between supposed spending cuts and actual spending increases is the result of politicians creating a system where a spending increase can be called a “spending cut” if outlays don’t climb as fast as previously planned. This “baseline” or “current services” budgeting is a great gimmick for the politicians since they can simultaneously give more money to special interest groups while also telling voters that they are cutting the budget.

This does not mean that the folks at the Fiscal Commission are being deliberately dishonest. This process has been in use for decades and many budget wonks routinely rely on this common practice without giving any thought to whether it misleads voters.

And there are good reasons to collect “current services” data. Those numbers tell lawmakers how much spending has to increase if they, for instance, leave entitlement programs on autopilot (i.e., more senior citizens automatically leading to more Social Security spending).

Nonetheless, the debate about federal budget policy should be honest. If the Fiscal Commission thinks spending should increase at about twice the rate of inflation, and they want higher taxes to finance that spending growth, they should openly argue for that position. And if the hard left wants spending to increase three times faster than inflation, as it has during the era of Bush-Obama profligacy, they should openly make the case for why America should be more like France.

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I don’t want to give anyone indigestion, but The Hill is reporting that GOPers on Capitol Hill want to require insurance companies to cover pre-existing conditions, which is one of the key provisions of Obamacare.

Speaking to more than 100 students at American University, Cantor said, “What you will see us do is to push for repeal of the healthcare bill, and at the same time, contemporaneously, submit our replacement bill, that has in it the provisions [barring discrimination due to pre-existing conditions and offering young people affordable care options].” Cantor stressed that while he supports full repeal of the current law, Republicans share some of the same goals as Democrats, although they propose different ways of achieving them. “We too don’t want to accept any insurance company’s denial of someone and coverage for that person because he or she may have pre-existing condition,” Cantor said, addressing a young woman in the audience who noted that she had a pre-existing health condition.

This story initially was seen as a sign that House Republicans were planning to keep certain provisions of Obamacare, but Cantor’s office claims he was misquoted and the story now includes a correction indicating that “House Republicans are pursuing a full repeal of healthcare reform while addressing issues in the law, such as pre-existing conditions.”

It doesn’t matter to me, though, whether Republicans violate free markets and ignore the laws of economics by keeping an Obamacare provision or by doing the same thing in a different way with a brand new provision. The bottom line is that private insurance markets will be seriously damaged if the government imposes a mandate requiring companies to provide policies (with no price adjustment) that cover pre-existing conditions.

Such an approach leads to a couple of problems. First, such a mandate will create a bad incentive structure since consumers will be tempted to wait until they’re sick before purchasing insurance. Second, regardless of when they obtain insurance, the mandate would result in higher premiums for everybody else, contributing to what is sometimes referred to as adverse selection, which occurs when relatively healthy people decide to leave the system because government rules push up prices by forcing them to subsidize other consumers. Insurance companies are then left with consumers that are more expensive to cover, which leads to even higher rates, which leads even more consumers to opt out of insurance (which is why this process sometimes is referred to as the health insurance death spiral).

Ironically, the Democrats supposedly solved this problem in Obamacare by imposing the insurance mandate, which helps explain why the big companies were supportive of the legislation.

So what’s the answer? I’ve been around the political system long enough that I actually can sympathize with GOPers who don’t want to appear heartless when dealing with tough issues such as pre-existing conditions, but they better figure out an approach that doesn’t lead to an especially destructive version of “Mitchell’s Law,” which is when one bad government policy (such as a mandate to cover pre-existing conditions) leads to even worse government policy (a health insurance mandate or a single-payer system).

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