The new magic makes supply-side economics old hat.

Policy made plain.
Feb. 24 2006 6:15 AM

Abracadabra Economics

The new magic makes supply-side economics old hat.

The hideous complexity of President Bush's prescription-drug program has reduced elderly Americans—and their children—to tears of bewildered frustration. The multiple options when you sign up, each with its own multiple ceilings and co-payments; the second round of red tape when you actually want to acquire some pills; the ludicrously complex and arbitrary standards of eligibility, which play a cruel and pointless game of hide-and-seek as they lurch up and down the graph paper like drunks: Suddenly a mystery is solved—so, this must be what he means by "compassionate conservatism."

Thus Bush's only major domestic accomplishment in six years as president has not achieved its intended purpose of cementing the affection of senior citizens for the Republican Party. Many Republicans are sobbing with frustration, too. It is one thing to put aside your principles and spend hundreds of billions of taxpayer dollars on the largest expansion of the welfare state since the Great Society if it is going to help you to win elections (so you can pursue your dream of smaller government). It is another to sell your soul and not get anything for it. No one looks more foolish than a failed cynic.

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But, look on the bright side, say the Bushies. The wretched thing does seem to be restraining drug prices and costing the government less than it was supposed to. The current cost estimate is only $678 billion over 10 years. That's down 8 percent from the previous estimate of $737 billion. Cool. But when the prescription-drug benefit was enacted in 2003, it was supposed to cost $400 billion over 10 years. As disenchanted conservative Bruce Bartlett retails in his new book about the Bush presidency, delicately entitled Impostor, there was a mini-scandal and an official investigation when it came out that the administration was hiding its own estimate of $534 billion. When the dust settled, that figure had become $557.7 billion.

Who believes any of these numbers? Do you? I will bet anyone a month's supply of Lipitor, collectible in 2016, that the 10-year bill will be more than $678 billion. Any takers?

What's shocking about this, more than the numbers (hundreds of billions of dollars are hard to fathom), is that Bush's drug benefit comes without even a theory about how it will be paid for. Even after nearly three decades of Republican abracadabranomics, this may be a first. A transparently phony theory at least pays tribute to the hypothesis that money doesn't grow on trees. Not even to bother coming up with a phony theory is an arrogant insult to democracy. It raises "because I said so" to a governing philosophy.

The classic Republican phony theory is, of course, supply-side economics. Every proposed tax cut from before Reagan until Bush's own has been defended on the grounds that it will pay for itself by stimulating new economic activity. This is a theory based more on faith than on evidence, but at least it's a theory.

Bush's other big attempt at a domestic initiative—Social Security privatization—came with a theory: Investing in stocks pays better than government bonds. So, you can close the looming gap between Social Security revenues and benefits—and even give the oldsters a bit extra—by letting folks invest for themselves at least part of what the government is now investing for them in those dismal bonds. The theory had a comically obvious flaw: How can society as a whole divert money from government bonds to private stocks as long as the government is still spending and borrowing as much as ever? But, at least, as I say, it was a theory. At least it paid us the compliment of obfuscation. Better to be duped than ignored. Bush's proposed Health Savings Accounts—as a way to cover the uninsured and restrain the rise in health costs—come with a theory that may even have some merit.

But the drug program has no theory. It addresses none of the conundrums of the pharmaceutical age. Pills are increasingly central to medical care, and many more miracles await. But pills are also a characteristic postindustrial product, like software or movies: They can cost billions to develop but can be mass distributed for practically nothing. Conventional supply-and-demand economics offers a compelling explanation of how an "invisible hand" sets the price and distribution of brooms or spaghetti sauce so that the benefit to society and individuals is maximized. But it has almost nothing to say about Fosomax or Windows or Brokeback Mountain. Conventional compassion, however sincere, is little guide to what you do about a lifesaving drug that costs $100,000 a year. And spraying government subsidies on the insurance industry and other big companies does not equal using the power of the free market to solve these problems.

Without a theory, the prescription-drug benefit is—like most government now—a straightforward matter of writing checks. Nothing wrong with that, in my book. But even if this subsidy to senior citizens survives its rocky premiere, it is doomed. Simple transfers of money cannot keep up with the rising cost—and rising benefit—of pharmaceutical drugs.

Long ago, in 1988, a Republican president and Congress enacted a bill to address the other missing piece in Medicare: insurance against the cost of long-term or catastrophic illness. But seniors, initially delighted, recoiled in horror when they discovered that they were actually expected to pay premiums to cover the cost of this insurance. The benefit program was repealed the next year, amid much embarrassment. It didn't occur to them back then to pass the benefit and ignore the cost. That's progress.

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