Menzie Chinn has provided a follow-up graph to the one that I mentioned on Friday in a post about the total cost to the public of the health care reform bill. 

He writes, “…I’ll just observe that if we are going to go down the road citing total costs, we need to be consistent in our comparisons. Let me illustrate with a back of an envelope calculation, where we compare cumulative costs of operations in the Iraq theater of operations to PPACA [The Patient Protection and Affordable Care Act, i.e. the health care reform bill — J.L.].”

Here’s his graph to that effect:

Dr. Chinn explained via email that the above graph is a bit misleading because the graphing software doesn’t do shading properly. What’s going on with the PPACA figure is that the effect on the budget is +$150 billion (meaning a deficit reduction of $150 billion), and the effect on the private sector’s spending is -$550 billion (from the RAND estimate), for a total cost of -$400 billion to the public and private sectors. The point being, the costs of the PPACA are still slight compared to those of the Iraq war, as calculated (pdf) by Nobel-winning economist Joseph Stiglitz. 

I think that the above graph is a perfect example of the point I was trying to make in the previous post, which is that debating about only the PPACA’s cost to the budget and not the total cost obscured some major points to the Democrats’ advantage. To make this clear, let me go into some detail about the numbers involved: 

The cost to the budget of the PPACA’s expansions of health insurance coverage, as scored by the Congressional Budget Office, is roughly -$150 billion because it includes net revenue increases $150 billion greater than net outlays on expanding health insurance coverage. To be specific, that means that the government will increase increase outlays on net by about $400 billion and revenues by about $550 billion, for the deficit reduction of $150 billion that Dr. Chinn includes in the above graph. For a clear explanation of these numbers, look at the first three bullet points in CBO director Douglas Elmendorf’s April presentation to the World Health Care Congress. 

So that means that the government more than pays for the increase in insurance coverage by cutting spending elsewhere and raising taxes. Taxes, of course, are a benefit to the budget but a cost to the private sector. So when Dr. Chinn includes the deficit reduction of $150 billion on the positive side of the ledger for the PPACA’s total cost, he is double-counting the taxes the private sector is going to pay because of the PPACA. That is, he is including the increase in revenues as both a benefit to the budget and to the total cost of the bill, neglecting to count the increase in taxes as a cost to the public, whose pockets those taxes will be coming out of. 

The fact that someone as numerate as Dr. Chinn, a quantitative economist, could confuse these numbers demonstrates just how difficult it is for most people to understand the costs involved in health care reform. 

In his post Dr. Chinn goes on to make a good point about the cost-benefit analysis of different bills: 

There is, of course, an odd asymmetry, in the treatment of costs. The additional economic costs for the Iraq category do seem like costs to me (transfers to Rest-of-World via higher oil costs, cost-of-life calculations due to American casualties), while the “costs” that Mr. Lawler attributes to PPACA do have some offseting benefits: if one reads the RAND report, for instance, length of life is extended for some of the formerly uninsured, which adds to the “costs”.

Well, all this argues for cost-benefit analysis. But of course, there seems to be great disagreement on tabulating benefits (For instance, I think implicitly some analysts ascribe zero weight to benefits extending quality and length of life to some previously uninsured — perhaps they are undeserving. I leave speculation for others).

I think that the larger point is that it’s not terribly useful to make comparisons of the cost-benefit analyses of policies as disparate as wars and health care reforms. With the war in Iraq the public was asked to weigh the fiscal costs of invading Iraq versus the benefits of, as was assumed at the time, rescuing Iraqi citizens from a horrible fate and preventing major terrorist attacks on the U.S. With health care reform, the public was asked to weigh certain fiscal and private costs versus the benefits of expanding insurance coverage, which entails things like increasing the lengths of some peoples’ lives. 

The biggest difference between the two analyses, I think, is that with health care reform the country had several different options. In deciding whether going to war in Iraq or anywhere I the public decision pretty much boils down to all-out war or nothing — as far as the public’s concerned, there aren’t many different ways to invade a country. Whereas with health care reform, the public was asked to choose whether they wanted the Democrats’ bill or whether they preferred an alternative approach to health care reform. 

So the analysis of the war in Iraq came down, more or less, to a “yes or no” decision. On the basis of that analysis we should not have gone to war, or at least that’s what I thought at the time (but I was 16, so who cares). The cost-benefit analysis of the PPACA leads me to conclude it is too costly, relative to other possible reforms. I just think that the public should have been better informed about all the costs relevant to that analysis.