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Six Mistakes Paul Krugman Makes About Medicare's Finances


Six Mistakes Paul Krugman Makes About Medicare's Finances

August 30, 2015

My usual custom when writing about Medicare and Social Security finances is to simply present the relevant data instead of discussing others’ commentaries about the programs. After this year’s Medicare trustees’ report was released, however, a subsequent Paul Krugman column prompted a number of questions from his readers, suggesting it would be helpful to address Dr. Krugman’s specific assertions. 

The essence of Dr. Krugman’s column was to cite the latest Medicare report as evidence that “there never was an entitlements crisis.” Dr. Krugman’s view of the Medicare financing outlook differs with the trustees’ perspective as reflected in our joint message, which states, “Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation.” The difference between these two perspectives derives in part from problems of incomplete information and analysis.

Problem #1: Conflating expectations with reality. Dr. Krugman’s piece points to long-term Medicare cost projections that now look less daunting than they did in 2009, and asserts that the entitlement cost problem is therefore “disappearing.” That characterization, however, is incorrect. Comparing to prior projections is in this context a distraction, irrelevant to whether Medicare is now on a stable financial course (it is not). 

The mistake is one of so-called “anchoring,” a behavioral economics concept referring to the powerful cognitive illusion whereby our perception of events is distorted by previous expectations. Whether things are actually getting better or getting worse is not a function of the trend of expectations but of real-world data evolving in time. Medicare cost burdens are mounting, not easing, as the accompanying graph shows. Total program costs have been rising faster than our economic output, and are currently projected to continue to do so. As many readers will intuit, it is highly problematic for any major spending program to grow significantly faster than the economy that must support it, as this can only lead to continually rising tax burdens, escalating debt, and/or crowding out other priorities.



Problem #2: Inconsistently measuring GDP. The graphs that Dr. Krugman reproduces to make his argument present projected Medicare spending as a percentage of GDP, contrasting this year’s projections with those of 2009. But in 2013 BEA redefined how GDP is measured, both historically and going forward. Adjusting the 2009 projections for this definitional change, one sees that a good portion of the apparent improvement to date is illusory. Dr. Krugman’s piece does not as far as I can tell disclose this inconsistency. Correcting for it, the recent picture looks only slightly better than 2009 projections, and has actually been worse in some years.



Problem #3: The large apparent improvements are mostly projections that haven’t yet borne fruit. As shown above, to date the Medicare cost picture is not greatly different than projected in 2009. All that’s really different are the future projections, especially over the long term. These anticipated improvements are due primarily to aggressive cost-containment provisions in the Affordable Care Act (ACA, or so-called “Obamacare”) as well as, to a lesser extent, the MACRA legislation passed earlier this year. The ACA provisions involve ambitious reductions in the rate of growth of Medicare provider payments, while MACRA’s involve reductions in the long-term growth of physician payments. Similar past efforts have not been adhered to, and some experts are skeptical that these new measures will be. This is why the CMS Medicare actuary has prepared an alternative projection scenario showing much higher future costs.



We should all hope, whether we supported or opposed these laws, that their cost-containment provisions prove successful and sustainable. Were they to be abandoned, other provisions would need to be enacted in their place to achieve equal or greater savings – otherwise taxes and/or premiums must be raised. That said, we cannot declare victory unless and until these provisions produce the savings now projected from them.

Problem #4: We haven’t fixed the entitlement growth problem, only changed the mix of entitlements. Dr. Krugman’s graphs show 2015’s Medicare cost projections well below 2009’s, prompting the conclusion that any supposed spending crisis has been solved or never existed. But this leaves out a defining part of the overall picture. True, the ACA reduced projected Medicare growth -- but it also expanded Medicaid as well as created a whole new system of health insurance exchange subsidies. 

If the thesis is that changes in spending projections since 2009 illuminate whether we really have an entitlement spending problem, one can’t simply show the one large entitlement where projected spending has gone down, and omit the ones where projected spending has gone up. Unfortunately we cannot analyze the whole picture using the trustees’ methodology because the trustees do not issue projections for the ACA’s health exchange subsidies. But earlier this year CBO estimated that by 2025, the ACA would add roughly $210 billion a year in new Medicaid and exchange subsidy spending, or roughly 0.8% of GDP. As it happens, 0.8% of GDP (adjusted for the changed definition of GDP) is roughly the amount by which the trustees have lowered (between 2009 and 2015) our projections for Medicare spending through 2025. Given that these two effects almost net each other out over the next decade it seems inappropriate to state, as Dr. Krugman does, that “most of that projected (spending) rise has gone away."

Problem #5: Crediting the ACA For Effects It Didn’t Cause. Dr. Krugman’s column states in one place, “health spending began moderating after the passage of the ACA.” This is incorrect. The health spending slowdown began several years prior to the ACA’s 2010 passage (see CRFB’s “Exhibit 2”). Dr. Krugman’s phrasing also lends itself to the misreading that the ACA is a primary reason for recent spending moderation. The CMS actuaries find, to the contrary, that the ACA’s effect has been on balance to slightly increase national health spending.



Problem #6: Not Reflecting Current Law. Less egregious because it involves a relatively arcane aspect of budgetary scoring, the graphs shown by Dr. Krugman reflect the trustees’ estimates of the costs of paying scheduled Medicare benefits, which is not the same thing as would occur under current law (because, over the long term, current law does not provide for the financing of these benefits). The distinction does not by itself undermine and indeed could be said to support Dr. Krugman’s argument that the entitlement crisis is overstated. It is, however, another reason why it is incorrect to credit the ACA for fiscal improvements, because on a literal law basis the ACA added on balance to federal entitlement spending, as CBO, CRFB and others including myself have explained

Conclusion: Dr. Krugman’s piece reaches incorrect conclusions about entitlement spending challenges “disappearing” based on incomplete information and analysis. When critical missing information is taken into account, it is more readily seen that lawmakers still face a substantial challenge to address unsustainable spending growth in federal entitlement programs.


Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

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