Why White House Burning Is Wrong, Liberal Edition

By James Kwak

Dean Baker, a leading economic commentator and author of the Beat the Press blog, has written a review of White House Burning for the Huffington Post. Baker manages the admirable feat of being gracious and complimentary while delivering several serious criticisms of the book.

I'll skip over the nice things he said and get to Baker's main objections, of which I think there are three. The first is that long-term fiscal sustainability is the wrong problem to be focused on:

 "While the solutions do not especially upset me, I do very much disagree with the diagnosis of the problem. The most immediate issue is that we have a fire at the moment in the form of too little demand leading to too much unemployment. This is wrecking the lives of millions of workers and their families.

"Johnson and Kwak understand this and certainly do not argue for deficit reduction in the short-term, but their focus on a longer-term deficit problem can be distracting from the more urgent problem."

I certainly understand this unemployment-first attitude. For many people, especially Democrats, the political story of the past two years is that all of Washington focused on deficits instead of economic growth and jobs. The villain of the story is either conservatives for insisting that deficits must be addressed now or the Obama administration for going along with them. From a policy perspective, the position of most mainstream Democratic economists is this: fix unemployment first, then deal with the national debt.

In fact, I don't disagree with this position. But I don't think this should mean that everyone should only write books about unemployment because anything else is a distraction. In fact, I think the refusal of most progressives to say anything about the national debt (other than "Yes it's a problem, but let's worry about it later") is a tactical mistake. It means that the spectrum of people talking about the national debt ranges from Tea Partiers on the right to self-proclaimed deficit hawks like the Gang of Six on the "left."

When Paul Ryan pushes some hare-brained scheme to reduce the national debt (while slashing taxes for the rich), most Democrats point out that he's a tool of the 1%—but they don't have an alternative solution to what many Americans think is a major problem. One reason we wrote White House Burning was to show that one could take the national debt seriously while defending the current role of government in society, and that it is possible to address the debt problem without huge cutbacks to programs that the middle class relies on.

To be fair, Baker's criticism is not simply that a book about the national debt is an unwelcome distraction. His next major point is that foreign purchases of dollar assets artificially increase the value of the dollar, creating a trade deficit, and so budget deficits are necessary to maintain employment:

"until we reduce the value of the dollar enough to get our trade deficit down to more normal levels, we will need large budget deficits to sustain high levels of employment. Rather than being a problem, the budget deficit is a solution to a problem created elsewhere."

I'm not about to delve into international macro late at night and with new-baby brain (that will have to wait for another post), but I'm not entirely convinced. In 1999, for example, the trade deficit was 2.8% of GDP (BEA), the federal budget surplus was 1.4% of GDP (OMB), and real GDP grew at an annual rate of 4.8% (BEA). In 2011, the trade deficit was 3.8% of GDP. I know there are many differences between 1999 and 2011. But if a large budget surplus was consistent with rapid growth and low unemployment in 1999, it doesn't seem obvious that a modestly larger trade deficit in 2011 would change that.

Baker's third major criticism is that we "misdirect readers" on health care costs.

"At the end of the day, we cannot afford to pay for a broken health care system. This is not just an issue of public finances. We can't have a health care system that costs 25-30 percent of GDP when everyone else gets comparable or better outcomes spending 10 percent of GDP.

"The projected run-up in private sector health care costs is every bit as much a cause for concern as the projected increase on the public side of the ledger."

I completely agree with everything he says about health care costs. I think Baker's criticism is that we talk about health care primarily in the context of federal health care spending instead of trying to solve the broader problem. To some extent, this is true, since we were writing a book about federal fiscal policy and the national debt, not about health care overall.

At the same time, I thought we made it clear that the health care problem goes beyond the federal government. This is from pages 132–33:

"As the largest buyer of health care in the economy, the government has some influence on overall health care prices, but that influence is limited. . . . While the cost of Medicare and Medicaid has been growing over the past few decades, the cost of health care that is not paid for by the government has been growing as fast as faster because it is subject to the same pressures: technological innovation and rising incomes. And without structural change, there is no reason to expect private health care costs to start falling. . . .

"Our health care problems are broader than our deficit problems. . . .

"The best solution would be one that reduces the long-term growth of health care costs for everyone, including the government."

Later in the book we argue that reducing health care costs will require systemwide change:

"The best way to reduce spending is probably to shift toward new health care delivery models that make providers accountable for both costs and quality; this will give them the incentive to improve coordination, apply the lessons of comparative effectiveness research, and focus on outcomes rather than simply maximizing their revenues by supplying unnecessary services" (p. 196).

There are two reasons why we focus on federal health care spending. First, as mentioned above, this is a book about federal policy, not about health care in general; I don't think we're qualified to write the latter. Second, from a public policy perspective, federal policy is one of the biggest levers available to change the behavior of the private health care system. Most providers take Medicare patients, and Medicare has been a major driver of change in the industry, for better and for worse.

The big problem we face, in my opinion, is that no one really knows how to bring health care costs under control (short of single payer, which would work but is a political non-starter). The current budget policy fad (Domenici-Rivlin, Bowles-Simpson, Ryan-Wyden, etc.) is to set an arbitrary cap on government health care spending. That, however, would simply shift costs onto individuals, which does Americans in the aggregate no good.

Our approach can be summarized as follows:

It would be great if we could figure out how to reduce health care costs across the economy. We should try to do that. But given all the health care experts out there, Simon and I aren't going to come up with a magic bullet.
So from a budget standpoint, we have to be prepared for a world in which health care costs continue to rise. To avoid simply shifting costs onto individuals, we have to find a way to pay for those costs. And we can.