Brooks and Krugman

This must have just about KILLED Bobo.  In “Great News! We’re Not Doomed By Soaring Healthcare Costs” he was forced to admit that there are lots of different ways to read what is happening, but overall there does seem to be some lasting improvement.  Prof. Krugman, in “Austerity’s Grim Legacy,” says the deficit fetishism that led to government cutbacks has been more destructive in the long run than even its critics anticipated.  Here’s Bobo:

It really matters who the next president is. But there are other things that matter just as much to the nation’s future prosperity. One of them is: What is happening to health care costs?

If health care costs start to rise again the way they did before, then health care spending will swallow the economy and bankrupt the federal government. If they are contained, then suddenly there’s a lot more money for everything else, like schools, antipoverty efforts and wages.

The good news is that recently health care inflation has been at historic lows. As Jason Furman, the chairman of President Obama’s Council of Economic Advisers, put it in a speech to the Hamilton Project last month, “Health care prices have grown at an annual rate of 1.6 percent since the Affordable Care Act was enacted in March 2010, the slowest rate for such a period in five decades, and those prices have grown at an even slower 1.1 percent rate over the 12 months ending in August 2015.”

As a result of the slowdown in health care inflation, the Congressional Budget Office keeps reducing its projections of the future cost of federal health programs like Medicare. As of October, projections for federal health care spending in the year 2020 were $175 billion lower than the projections made in August 2010. That would be a huge budget improvement.

The big question is whether these trends will continue. Many people believe that health care inflation came down for entirely temporary reasons and that over the long run we’re still doomed.

One group in this camp emphasizes that the economy went into the tank, so of course people went to the doctor less often. As history demonstrates, it can take up to six years for a recession’s impact to work its way through the system; then health care costs shoot up just as before.

Another group emphasizes that health care inflation is down because general inflation is down, and once general inflation is back to normal, health care costs will shoot upward.

A third group argues that we’ve recently had a decline in technological innovation. Not many useful but costly new drugs or machines have come on the market over the past few years, but if innovation resumes then so will rising costs.

But other experts say the reduction in health care inflation is partly structural and therefore more longstanding. Some point out that health care inflation really began trending downward in 2003 or 2004, during George W. Bush’s first term and long before the recession hit. Second, the reduction in health care cost growth seems to be global. Health cost growth has slowed in just about every high-income country since 2000, possibly as efficiencies are passed from place to place.

Members of the Obama administration like to argue that Obamacare has pushed things along. For example, the Affordable Care Act pushed providers into Accountable Care Organizations. Instead of getting paid for doing more tests and procedures, providers have a greater incentive to just keep people healthy.

The law also encouraged bundling. If you go in to get a hip replacement, the government makes a single payment for all services associated with that episode of care. The law also penalizes hospitals when patients have to be readmitted. There’s been a significant drop in readmissions.

There’s still a lot of uncertainty about which side of the debate is right. The most recent numbers have indicated a scary surge in health care prices, and some firms are projecting 6.5 percent inflation for 2016. While parts of the law reduce spending, other parts may lead to more spending, especially as the industry gets more concentrated.

And yet the weight of the evidence suggests that part of the change is permanent. Moving away from the bad old fee-for-service system has got to be a good thing. The greater pressures providers feel to reduce costs have got to be a good thing, at least fiscally.

Last March, Jonathan Rauch wrote a report for the Brookings Institution, arguing that the health care market is more open to normal business model innovation than ever before. The quality of health care data and analytics is improving exponentially. Pressures to reduce costs are ratcheting up. Profitable niches are growing for efficiency improving products.

In the past, most innovation involved improving quality of care at high cost. Rauch described many entrepreneurs who are providing innovations that maintain current quality of care but at lower cost.

We seem to be making at least some incremental progress toward a structural reduction in health care inflation. Many Americans are feeling gloomy about accomplishing anything these days, but progress is possible. We haven’t whipped health care inflation, or defeated our intractable budget issues. But the evidence suggests we’re landing a few serious blows.

And of course the mole people will no doubt try another 50 times to repeal Obamacare…  Here’s Prof. Krugman:

When economic crisis struck in 2008, policy makers by and large did the right thing. The Federal Reserve and other central banks realized that supporting the financial system took priority over conventional notions of monetary prudence. The Obama administration and its counterparts realized that in a slumping economy budget deficits were helpful, not harmful. And the money-printing and borrowing worked: A repeat of the Great Depression, which seemed all too possible at the time, was avoided.

Then it all went wrong. And the consequences of the wrong turn we took look worse now than the harshest critics of conventional wisdom ever imagined.

For those who don’t remember (it’s hard to believe how long this has gone on): In 2010, more or less suddenly, the policy elite on both sides of the Atlantic decided to stop worrying about unemployment and start worrying about budget deficits instead.

This shift wasn’t driven by evidence or careful analysis. In fact, it was very much at odds with basic economics. Yet ominous talk about the dangers of deficits became something everyone said because everyone else was saying it, and dissenters were no longer considered respectable — which is why I began describing those parroting the orthodoxy of the moment as Very Serious People.

Some of us tried in vain to point out that deficit fetishism was both wrongheaded and destructive, that there was no good evidence that government debt was a problem for major economies, while there was plenty of evidence that cutting spending in a depressed economy would deepen the depression.

And we were vindicated by events. More than four and a half years have passed since Alan Simpson and Erskine Bowles warned of a fiscal crisis within two years; U.S. borrowing costs remain at historic lows. Meanwhile, the austerity policies that were put into place in 2010 and after had exactly the depressing effects textbook economics predicted; the confidence fairy never did put in an appearance.

Yet there’s growing evidence that we critics actually underestimated just how destructive the turn to austerity would be. Specifically, it now looks as if austerity policies didn’t just impose short-term losses of jobs and output, but they also crippled long-run growth.

The idea that policies that depress the economy in the short run also inflict lasting damage is generally referred to as “hysteresis.” It’s an idea with an impressive pedigree: The case for hysteresis was made in a well-known 1986 paper by Olivier Blanchard, who later became the chief economist at the International Monetary Fund, and Lawrence Summers, who served as a top official in both the Clinton and the Obama administrations. But I think everyone was hesitant to apply the idea to the Great Recession, for fear of seeming excessively alarmist.

At this point, however, the evidence practically screams hysteresis. Even countries that seem to have largely recovered from the crisis, like the United States, are far poorer than precrisis projections suggested they would be at this point. And a new paper by Mr. Summers and Antonio Fatás, in addition to supporting other economists’ conclusion that the crisis seems to have done enormous long-run damage, shows that the downgrading of nations’ long-run prospects is strongly correlated with the amount of austerity they imposed.

What this suggests is that the turn to austerity had truly catastrophic effects, going far beyond the jobs and income lost in the first few years. In fact, the long-run damage suggested by the Fatás-Summers estimates is easily big enough to make austerity a self-defeating policy even in purely fiscal terms: Governments that slashed spending in the face of depression hurt their economies, and hence their future tax receipts, so much that even their debt will end up higher than it would have been without the cuts.

And the bitter irony of the story is that this catastrophic policy was undertaken in the name of long-run responsibility, that those who protested against the wrong turn were dismissed as feckless.

There are a few obvious lessons from this debacle. “All the important people say so” is not, it turns out, a good way to decide on policy; groupthink is no substitute for clear analysis. Also, calling for sacrifice (by other people, of course) doesn’t mean you’re tough-minded.

But will these lessons sink in? Past economic troubles, like the stagflation of the 1970s, led to widespread reconsideration of economic orthodoxy. But one striking aspect of the past few years has been how few people are willing to admit having been wrong about anything. It seems all too possible that the Very Serious People who cheered on disastrous policies will learn nothing from the experience. And that is, in its own way, as scary as the economic outlook.

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