Hypothetical Mean

Commentary from an Actuarial and Economic Perspective

Selective Perspectives on Fiscal Responsibility

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Econbrowser‘s Menzie Chinn writes critically on the sudden and arguably selective fiscal restraint of the Bush II administration. Chinn argues that a $5 billion per year SCHIP expansion is small potatoes compared to Part D and other fiscal ills of the current administration.

Relatively speaking, I agree. However, he mixes and matches time horizons, thereby making his suggested comparison flawed.

David Walker from the GAO has been on a Fiscal Wake-up Tour. Here’s his latest chart.

David Walker's 2007 Fiscal Wake-up Tour

Notice that the implicit exposures are actually the present values of 75-year liabilities. For example, the Medicare Part A liability of $11.3 trillion comes from the 2006 Medicare Trustee Report (Table III.B9).

On a 75-year present-value basis, what is a better estimate for the cost of SCHIP expansion? My quick answer is $439 billion. This would be the apples-to-apples comparison. This is still dwarfed by the size of Part D. However, it is also not small potatoes, to mix my fruit metaphors.

Lastly, although all of these numbers are shockingly large, it is important to remember that they may occur over a very long period of time. The collective resources available to the American economy over the next 75 years are likewise immense. Therefore, perhaps the best practice is not to mix 75-year cost projections into the SCHIP argument at all.

Regardless, if anyone wants more details on my calculations and assumptions, see below the fold.

1) I assume that the costs of the eventual SCHIP bill mirror the CBO’s cost estimate for HR 976. 2008-2012 costs are, therefore, estimated to be $2.4b, $4.2b, $6.1b, $7.4b, and $8.3b.

2) After 2012, I assume that SCHIP will be reauthorized, with future spending increasing with health care trend.

The 2006 Trustee report assumed trend would growth as a function of GDP, with growth in the first 25 years being 2-3% higher than GDP growth, eventually tapering to 1% higher than GDP growth. They assume GDP growth of 4.1%. Here, I simply assume a 1.5% higher-than-GDP growth through 2032, followed by a 1% higher-than-GDP growth thereafter.

3) I used the same nominal interest as 2006 Trustee report: 5.7%.

4) I did not include any revenue offsets. The bill may be paid for, in part, by an increase in taxes on cigarettes. First, I have no good data from which to project 75 years of smoking patterns. A likely pattern would be a gradual decline in smoking habits. Second, I am not clear as to whether the cigarette tax revenue stream is dedicated to SCHIP, or whether it is just an increase in overall tax revenues. Third, the government has this revenue stream available to it, regardless of whether it passes SCHIP. Fourth, the revenue raised by the federal government through this tax will come partly as an offset to state government revenue via the small elasticity of demand for cigarettes. Fifth, Chinn ignores revenue offsets in his discussion, as well, so my practice here is comparable to his commentary.

In sum, I felt it more appropriate to ignore the revenue streams that may be included in the bill. Interested readers could develop models for offsetting revenue and I would not object.

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Written by Victor

September 27, 2007 at 6:08 pm

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