AEI Touts the End of the Deficit Problem

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Written by Dean Baker   
Friday, 17 February 2012 11:39

Okay, they didn't do it in exactly those words, but that is the implication of a blog post by J.D. Keinke at the American Enterprise Institute. Keinke notes the sharp reduction in the growth rate of annual health care expenditures, with spending growth the last two years coming in at under 4.0 percent.

Keinke takes this as evidence that the health care system has fixed itself and that the country no longer suffers from out-of-control health care costs. We may want to hold off a bit longer and see a few more years of data before we break out the champagne. We may also question the story that this slowdown was due to the market working its magic in the health care sector.

There are a lot of efforts at cost control being tried at all levels of government. Perhaps these cost-control efforts really have nothing to do with the slowing of spending, but it would be good to see some evidence here rather than just an assertion.

It is also worth noting that this is a simple explanation for slower cost growth in at least one area: prescription drugs. According to the Food and Drug Administration's ratings, in the last decade, the industry has developed very few new "priority" drugs that involve qualitative improvements over existing drugs. New drugs have historically been the main cause of higher drug prices. In this case, the slower rate of growth in spending is a mixed blessing.

However, there is one thing we can say with certainty if Keinke is right about the future path of spending growth. If the rate of growth of health care spending remains at the pace of the last two years, then we can throw all those projections of exploding long-term budget deficits in the trash.

It was always health care costs that drove the scary budget scenarios that Peter Peterson and the deficit hawk gang loved to tout. If we are now living in a world where health care spending grows at pretty much the same rate as the overall economy, there will no longer be a deficit tsunami in the long-term budget projections that can be used to justify cuts in Social Security, Medicare and other important programs. If Keinke is right we can look forward to lots of unemployed deficit hawks in the near future.

Tags: budget | economy | health care