http://www.nytimes.com/2014/11/13/upshot/the-jonathan-gruber-controversy-and-washingtons-dirty-little-secret.html?abt=0002&abg=1&_r=0NOV. 12, 2014
Neil Irwin
Suppose that Congress decides that everyone in America should have an iPhone. There are two ways it can do this:
1) The government could allocate money to buy all Americans iPhones.
2) The government could require that everybody buy an iPhone but create a tax credit equivalent to the price of the phone.
To an economist, these things are pretty much identical. To a politician, they are very different. The first is a big-spending government giveaway. The second is a tax cut. And in that distinction lies the heart of the firestorm around comments by one of the intellectual godfathers of President Obama’s health reform law.
That would be Jonathan Gruber, an M.I.T. health economist who helped design the Massachusetts health reforms on which Obamacare was based and then advised the Obama administration on that program’s design. At an academic panel in 2013, he said that “this bill was written in a tortured way to make sure” the Congressional Budget Office “did not score the mandate as taxes.” He also said that “lack of transparency is a huge political advantage,” and added, "Call it the stupidity of the American voter or whatever, but basically that was really, really critical to getting the thing to pass.”
It looks like a shocking instance of a onetime Obama adviser saying that the administration pulled the wool over America’s eyes in advancing major legislation. That is certainly how many conservatives are interpreting it after a video of the remarks started circulating this week.
But here’s the dirty little secret: Mr. Gruber was exposing something sordid yet completely commonplace about how Congress makes policy of all types: Legislators frequently game policy to fit the sometimes arbitrary conventions by which the Congressional Budget Office evaluates laws and the public debates them.
In the case of the Affordable Care Act, that meant structuring the law so that the money Americans must pay the Internal Revenue Service if they fail to obtain health insurance under the law’s mandate is a penalty, not a tax. (The Supreme Court held that, though not a tax, the penalties were constitutional because they were an exercise of Congress’s taxing authority, which is the kind of distinction only a lawyer could come up with). That’s the reason the financial assistance the health law gives people to buy insurance is structured as a tax credit, not a direct payment, which would probably be simpler and more efficient.
And as Sarah Kliff notes at Vox, it is also why the law was structured to expand insurance coverage three years after passage. That way its cost estimate by the C.B.O. was kept under $1 trillion during the first decade after enactment. One trillion was the highest number that Democratic leaders thought was politically feasible.
This kind of gamesmanship is very much a bipartisan affair. President George W. Bush’s expansion of Medicare in 2003 was carefully designed so that its costs were backloaded, rising sharply just after its 10-year mark. Estimating costs in the 10-year window is an (arbitrary) convention for C.B.O. scoring of pending legislation. The design of the law made it seem less costly than it was expected to be over a longer time period.
To economists, it doesn’t matter whether our hypothetical iPhones are bought directly by the government or “bought” through tax cuts. It doesn’t matter whether Obamacare’s subsidies happen through a tax credit or a check in the mail. It doesn’t matter whether the costs of Bush’s Medicare expansion were projected over a 10-year time horizon or 15.
In business school, they teach that there are two types of accounting. Financial accounting must follow the strict, and frequently arbitrary, rules of generally accepted accounting principles in preparing the financial statements released to investors. But a different approach, cost accounting, is for managers trying to understand the true economics of their business, such as whether a given business line is profitable. In cost accounting, the goal is less about following some set of rules to report to outsiders and more about understanding what is really in the company’s best interest.
Essentially, Congress is obsessed with the government equivalent of financial accounting standards (with the C.B.O. as the rule maker) instead of cost accounting. It structures the laws in ways that might not be very efficient but sound good on the stump. Mr. Gruber was, in an infelicitous way, expressing frustration with that state of affairs.
