August 30, 2015

Six Mistakes Paul Krugman Makes about Medicare's Finances

Charles Blahous

J. Fish and Lillian F. Smith Chair
Summary

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.

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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.

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