Friday, December 21, 2007

Wishful Thinking

The Washington Post gets my old friend and Harvard colleague Larry Summers to answer questions from the public. This exchange intrigued me:

New York: Which government spending should be cut to pay for a tax cut?

Lawrence H. Summers: comprehensive health care reform could ultimately lower government spending.

Larry is right: Comprehensive health care reform could lower government spending, much as lowering tax rates could increase tax revenue. Theoretically, many things are possible.

Raising the issue, however, makes it sound like Larry believes this outcome is likely. From my perspective, this is just wishful thinking. Debate over health reform typically centers around covering the uninsured. I doubt that this goal is going to be achieved with reduced government spending.

Some on the left want a single-payer system, which would in effect use the monopsony power of the state to reduce payments to suppliers of health products. But I would be surprised if Larry, with his generally sensible market-oriented views, favored those kind of health systems.

I wonder: Might this idea--that a tax cut can be financed by comprehensive health reform--become a new meme of the left? If so, I would encourage Larry to record this moment in intellectual history, perhaps by writing the theory down on a napkin.

Update: On my invitation, Larry responds:

Dear Greg--

Thanks for asking if I have any comment on your blog entry today.

I am flattered to see you following my internet chats so closely. You got me. The passage you quote is as you suggest technically accurate but misleading. It is very likely that at least for a long time comprehensive health care reform done properly would raise total government spending. Much as some might wish otherwise, there is no health care Laffer curve. The right answer to the question is that the increment to debt should be paid over time through whatever combination of spending and tax measures congress chooses and that in the health care space there is room for measures that would save money. My answer was much too telegraphic.

While we are on the subject of fiscal truths, I was a great admirer of the way the first edition of your textbook treated the idea that tax cuts could raise revenue. If I recall you used the word "charlatan" to describe economists who subscribe to this view. Such memorable language does not appear in subsequent editions. Does this reflect a) your view that you exaggerated the first time b) your changing you mind on the substance c) your view that the whole matter is uninteresting d) your concern that your readers do not know what a charlatan is e) your desire to make sure your book does not annoy charlatans who teach introductory economics?

Happy holidays.

The answer to Larry's question can be found here, where I write, "In the second edition of the text, I took out the phrase 'charlatans and cranks' because an editor and some readers of the first edition said (correctly) that it was too inflammatory for a textbook description of a policy debate. But the substantive analysis of tax policy stayed about the same. This old post includes an excerpt from the current edition."