Nov 05 2012

Trees to the Sky

Yves Smith at Naked Capitalism has pointed out an important new study for defenders of the social safety net, specifically Medicare and Medicaid (anyone claiming that Social Security contributes to the deficit is simply a liar and a thief).

The name of the paper is An Examination of Health-Spending Growth In The United States: Past Trends And Future Prospects (.pdf) by Glenn Follette and Louise Sheiner.  As she points out the first important thing to recognize about it is who it comes from.

(T)he authors are uniquely qualified to make this critique. Follette is chief of the Fed’s fiscal analysis section. Sheiner, a fellow member of that group, has worked for both the Treasury and the Council of Economic Advisers previously. In other words, the sort of analysis they have made here is the core of what they do on a daily basis.

Fed Budgetary Experts Demolish CBO Health Cost Model, the Lynchpin of Budget Hysteria

Yves Smith, Naked Capitalism

Sunday, November 4, 2012

(C)onventional wisdom is that Medicare does have a long term cost predicament, but the problem is not demographic, but that of the steep rise of health care costs in general.

The fundamental beef of Follette and Sheiner with the CBO model is that it naively assumes past growth in health care spending as the basis for its long-term projections. The result is that it shows that trees will grow to the sky. One of the things anyone who has build forecasting models will tell you is you come up with assumptions that look reasonable and then sanity check the output (for instance, does your model say in year 10 that your revenues will be 3x what you can produce given your forecast level in plant and investment? If so, you need to make some revisions). The Fed economists point out numerous ways that the model output flies in the face of what amounts to common sense in the world of long term budget forecasting.

The CBO assuming public health care spending will sustain its growth rate of the last 50 years for as long as they do (see further discussion below) with no policy changes is like budget analysts in 1946 assuming that military spending will grow at the same rate it did during World War II without any policy changes. Yet they further assume that, having reached this crushing level, Medicare costs in 2082 will still be growing faster than GDP!

The underlying issue is that nothing that is a large portion of GDP can exceed the growth rate of GDP forever, or even for all that long; that’s how we’ve gotten in the insane position of having health care reach 16% of GDP. The term of art is “excess health care spending growth” which as noted above, they define in relationship to per capita incomes.

The CBO’s performance on this front looks like malpractice. The Fed economists note telling irregularities, such as the substitution of scenarios, as opposed to the use of confidence band analysis, as the CBO employed in its Social Security forecasts. And this would not the first time that CBO has apparently allowed political considerations to interfere with its pretense of objectivity. First we have the case of CBO analyst Lan Pham, who was fired for attempting to incorporate the impact of foreclosures and chain of title issues on home price and property tax forecasts. Second, we have the instance of Tom Ferguson and Rob Johnson of alerting the CBO to a significant omission in their deficit analysis, that of failing to include financial assets in their debt-to-GDP ratio calculation. CBO staffers have not disputed the accuracy of the Ferguson/Johnson research but nevertheless will not change their projections. Now we have what is demonstrably an overly aggressive set of assumptions driving health policy debate, with two Federal Reserve analysts sufficiently taken aback by the model as to publish a serious takedown of it.

The CBO’s independence is, like its output, treated as above question. It’s time to subject both to harsh scrutiny.

The thing about ‘trees to the sky’ is that they all grow to the sky, but they do not grow indefinitely or at a constant rate.  Assuming that they do is at best naive and at worst disingenuous.

So, stupid or evil?


  1. ek hornbeck
  2. BobbyK


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