The Laffer Curve of the Left

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Several days ago, Tyler Cowen triggered some righteous rage for suggesting that the administration's promises to cut health care costs "runs the risk of becoming the new voodoo economics".  He was expressing a growing frustration among reputable conservative economists that the promises of health care cost control have turned into the Laffer Curve of the left:  a way to pretend that their favored policies don't have any costs.

It is true that some countries have controlled costs, and therefore made it easier to afford coverage for more people.  It is also true that some countries have cut marginal tax rates, and thereby actually raised the tax revenue they collected.  For all the derision about the Laffer Curve, it is absolutely correct--indeed, it has to be; it's basically just an identity.  Tax revenues peak somewhere.  If you're to the right of that peak, you could raise revenue by lowering rates.

What's left is the empirical question:  are we to the right of that peak?  Empirical answer:  no we are not.  It was not unreasonable for Ronald Reagan to believe that we might be, since the world didn't have all that much experience with lowering 70-90% marginal tax rates.  (Indeed, arguably, we were to the right under JFK, and his tax cuts may actually have raised revenues).

But the empirical answer, when all was said and done, is that we were on the left-hand side of the curve.  Moreover, we remain on the left-hand side of the curve.  Moving further left will just make the revenue picture even worse.  The Republican wonks and politicians who claim otherwise are either really, really dimwitted, or engaged in an intellectual sham of breathtaking dishonesty.  The rank-and-file who have accepted this nonsense have been hoodwinked, and should be righteously angry at their leaders.

And what about health care costs?  Is it reasonable to believe that we are going to control them?  After all, other countries have.

I'd say we have substantial empirical evidence that we are not going to control the health care cost inflation which is busting Medicare's budget, much less the new costs the administration is planning to add.  We have been trying to control health care costs since the 1970s made it clear that Medicare was going to get really, really expensive.  And any idea that you care to name, from comparative effectiveness research to healthcare IT to preventive medicine . . . these have all been on the table for more than thirty years, under one name or another.  They haven't happened.

The answer that those promising magical cost reductions need to ask is "Why haven't they happened?" and "What has changed to make them feasible now?"  But when I ask this question, I get angry demands that I put forward my plan for cost control, rather than merely critiquing everyone else's.  This seems rather like demanding that I put forward my design for a perpetual motion machine before I am allowed to point out problems in the US energy market.

To those who say, pretty reasonably, "Why not demonstrate that you can control these costs in Medicare before asking us to believe you can do it with a broader program?"  the response is something like a snapped, "But I don't want to just control Medicare costs!  I want universal coverage!"  Ah.  Well, Republicans don't want to maximize tax revenue; they want to cut taxes.  This does not make their now-deliberate wishful thinking any prettier.  Nor obligate the rest of us to fulfill their desire at the expense of sound budget policy.

Both Medicare cost control and Republican tax cuts are like the Red Queen's strategy in Alice in Wonderland:  "Jam yesterday, and jam tomorrow, but never jam today".  They promise sweeteners to sell their favored policies, but when the day actually arrives, time and time again we're left holding an empty jar.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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