• Josh Barro is very good

    Just go read his piece on the Medicare Trust Funds.


    • Good piece overall but he is playing games with semantics here:
      “There is no pool of investments in the fund, just Treasury bonds that list the federal government as both creditor and debtor.”

      Treasury bonds are not investments?

      Yes, it is money that the government borrows from the fund (just like the Social Security trust fund) but they are real bonds and real obligations. If the government didn’t borrow from the trust funds, they would just borrow from the Chinese or somewhere else and the obligation to repay these bonds is the same regardless of where they borrow the money.

      • I agree with you Mark, it bugs me when people talk like these aren’t real obligations of the treasury.

        In a crisis, it seems very unlikely to me that we would pay back the Chinese while allowing our seniors to starve or go without medical care.

    • Have to disagree with you on this one. Barro calls the Hospital Insurance trust fund “an accounting fiction” based on the notion that there are “just Treasury bonds” in the fund. But as Mark Spohr notes, these Treasury bonds are just as real as the bonds held by private investors. Moreover, the economic and budgetary situation would be exactly the same if the trust funds were invested in private stocks or bonds. (See http://www.cbpp.org/cms/index.cfm?fa=view&id=3299.) As long as we finance Hospital Insurance through earmarked payroll tax revenues, the current trust fund arrangement is the only sensible way of keeping track of the inflows and outflows.

      • I don’t have an objection to what you wrote, Paul. I also don’t have a visceral reaction to “an accounting fiction.” I interpret “just Treasury bonds” as I would in any other context, obligations of the Treasury, backed by the taxing authority of the government. Quite reliable!

        I took his point to mean that US taxpayers are the backstop. That would not be the case if the Trust Fund held other types of assets. I am not suggesting that it would be preferable if it did so. I do not think it’d be wise for the Trust Fund to try to play the broader market. Also, I don’t see why we should believe that future taxes would be any different in that case. If the Trust Fund didn’t lend to the Treasury, my guess is that it’d just sell more bonds to someone else.

        Having said all that, I do not think that calling the Trust Fund either a “fiction” or a “Trust Fund” by itself aids understanding. Calling it “obligations of future taxpayers” goes a long way for me, though I doubt very many would find that helpful.

        Ultimately, I thought Barro’s piece was very good. Apart from the few words we’re debating here, do you have any other issues with it?

        • It’s not merely a question of words. Barro seems to think that the form of the trust fund investments matters. It doesn’t. Barro also suffers from pseudo-evenhandedness. He obviously doesn’t like the idea of having a Hospital Insurance trust fund, but as long as we do, it’s factually correct that health reform has extended its solvency. That’s no “thin claim.” Barro also perpetuates this foolish “double-counting” notion. Both CBO and the Medicare trustees know how to count. Neither one is counting anything twice.There’s some useful stuff in this piece, but it’s hard to separate the wheat from the chaff.

          • Fair enough. If there is an equivalently short piece for a non-technical audience that does a better job, let me know.

          • I didn’t see Barro accuse the CBO or the Medicare trustees of double counting, he pointed out that the administration has double counted when discussing the bill. That is not foolish nor is it incorrect. The CBO even acknowledged as much, and specifically said that the way the savings were being described were double counting.

            If it is factually correct that reform has extended the solvency of the trust fund then it is factually incorrect that those funds can pay for coverage expansion without impacting the deficit. I was not aware that this was still controversial, it was discussed ad nauseam over two years ago.

    • Austin, try looking at this very short piece, to see if it meets your needs:


      I, too, am very bothered by the “trust fund isn’t real” discussion in Barro’s paper. One should note that it would be quite possible for the trustees to SELL the bonds in the trust fund on the private market, and trade them for cash. The only reason they don’t do this is that the bonds earn interest.

      • David,

        Even if the Trust Fund sold its assets, the Treasury would still have to make good on them. No matter how you slice it, the Trust Fund represents obligations of future tax payers. The only meaning it seems to have is that those obligations are to the Trust Fund. That is, Medicare has a claim. That’s not nothing. That’s not fictional or farcical.

        The big question is what is the counterfactual? What would be the state of the deficit if Medicare did not hold Treasury bonds? One view is that the deficit would be just the same because the other obligations of the government and tax receipts would not change. The Treasury would just sell bonds to others, rather than to Medicare. Another view is that there would be market effects, that the rate of interest the Treasury would have to offer would be higher if it had to sell more on the market, and this would hasten the day when we had to cut the deficit. In other words, the deficit would be somewhat lower if the bonds had to be sold on the market instead of to Medicare.

        I don’t know which view is more likely to be correct. Are you aware of any good work on this?

        Finally, it is my understanding that the bonds Medicare (and Social Security) buys are not the same as bonds you and I can buy. They are “special bonds” that cannot be sold in the market. I will try to confirm this.