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Updated budget projections from the Congressional Budget Office released yesterday show that the deficit this year is on track to be the smallest since 2008, the start of the recent recession, and that debt as a share of total economic output is stable over the decade-long budget window and actually declining over the next several years.

Fast falling deficits aren’t themselves good news – macroeconomists estimate that federal belt-tightening over the last two years has shaved two percentage points from economic growth and added one percentage point to the unemployment rate, a fiscal policy ‘own goal’ with growth and employment remain depressed from the recession. But part of the drop in deficits comes from a very encouraging trend: evidence is mounting that the recent steep decline in healthcare spending could (with help from the right policies) become permanent.

From 2003 to 2012, health care spending grew at an annual rate of just 1.9 percent (after adjusting for inflation and population growth). Over the last three years, the growth rate was just 1.2 percent, the slowest since 1970 except during the latest recession. 

As the CBO becomes increasingly confident that slowing health care spending won’t rebound as the economy recovers, it is lowering its projections for the future cost of government health care programs. Since March 2010, CBO-projected spending on Medicare and Medicaid has quietly fallen by about $225 billion for the next decade, or roughly 15 percent for each program. That’s a significant reduction in – it’s more than double the savings that would come from raising the Medicare eligibility age from 65 to 67 – but comes entirely from ‘technical’ changes, not policy changes.

New Economic Research Identifies Permanent Factors Slowing Health Spending

Two new studies support the existence of permanent factors that are slowing health care spending.

A Health Affairs article published Monday by Harvard professor David Cutler found that the recession explained 37 percent of the health care spending slowdown from 2003 to 2012, and 8 percent came from a decline in private insurance coverage and cuts to some Medicare payment rates, leaving open the possibility that the majority (55 percent) of the slowdown was the result of fundamental changes.

A recent Kaiser Family Foundation study is more measured, and estimates that 77 percent of the recent decline in health spending comes from economic factors, but says “structural changes in the health system may be playing a modest role as well”.

Evidence of Structural Decline in Health Spending Highlights Potential of Obamacare

Professor Cutler’s research identifies three factors unrelated to one-time events like the recession that could be contributing to slower cost growth: less rapid technological change, increased cost sharing, and greater provider efficiency. While these factors are difficult to forecast – technological innovation is, almost by definition, unpredictable – they do show that runaway health spending is not a foregone conclusion, and that steps (built on existing trends) can be taken to rein in costs.

Any of the structural changes to health spending already at play pre-date Obamacare. Much of the law’s broad array of cost-reduction initiatives – including smaller increases in payments to Medicare providers, taxes on high cost “Cadillac” health plans, and accountable care organizations – have not yet taken effect.

But the sizable difference structural changes are already making to health care costs suggests that health reform does have the potential to materially lower future costs. If non-temporary factors are already materially ‘bending the cost curve’, upcoming reforms may be able to do the same. One conclusion Cutler draws from his research is that “the future of the Affordable Care Act may be as important to health care spending as economic growth is”.

Slowing Health Spending Has Rewards: Up To $430 Less In Health Expenses Per Covered Worker For Employers 

The slowing of health spending is so important because it has economic rewards more immediate than reducing long-term demographics-driven budget pressures.

Professor Cutler’s research reports that if spending growth stays at levels seen in the last three years, public health care spending would be $770 billion less over the next decade than currently projected by government actuaries.

This windfall would have serious implications for businesses, who would spend $92-$430 less on health expenses per covered worker, and households, who would spend $62-$290 less on out-of-pocket health expenses.

Aggregated across the economy, lower health care spending would have significant macroeconomic benefits. White House economists calculated in 2009 that reducing the annual growth rate of health care costs by 1.5 percentage points a year would boost economic output by more than 2 percent in 2020 and almost 8 percent by 2030. Shifting resources from health care to more productive sectors of the economy has a significant economic impact.

If the cost-saving measures in health reform can essentially replace the role of the recent recession in slowing health care spending, the federal balance sheet and overall economy will see significant benefits.

You can contact the author of this post by sending an email to njoshi@businessfwd.org. 

All of the current trade deals in the G-8 pipeline are worth over $1 trillion in added global incomes, wrote British Prime Minister David Cameron in a Wall Street Journal op-ed this morning. Cameron is in Washington today to meet President Obama and highlight one of those deals, between the U.S. and E.U., which will be discussed during an April meeting of the G-8 in North Ireland.

The White House is currently pursuing major trade initiatives that would bring down barriers to trade with our single largest trading partner (the EU), with a fast-growing region responsible for almost 40% of global output (the Asia-Pacific region) and for a dynamic sector responsible for four of every five U.S. jobs (the services sector) :

1. Transatlantic Trade and Investment Partnership: More than 13 million jobs on both sides of the Atlantic are supported by trade between the U.S. and Europe.  Liberalizing trade between the world’s two largest economic zones could significantly increase global economic growth. Tariffs between the U.S. and Europe, averaging less than 3%, are already low. Now, the U.S. and E.U. are seeking to address non-tariff barriers, such as differences in regulatory and standards regimes, and increase cooperation on economic development matters.

2. Trans-Pacific Partnership: The region included in Trans-Pacific Partnership represents 11 trading partners, including critical Japan, which does not currently have a Free Trade Agreement with the U.S. Ongoing negotiations are addressing a wide range of issues, including state-owned enterprises, involvement of small and medium-sized businesses in trade, and regulatory transparency and coherence.

3. International Services Agreement: The U.S. has announced it will join 20 other partners in removing global barriers to service-sector trade. Though the U.S. is a top global service exporter, only 5% of U.S. services firms export.  By comparison, one in four U.S. manufacturers exports its goods.

For centuries, the U.S. has attracted the best and brightest immigrants. But today's system of quotas, caps and mixed priorities blocks or discourages entrepreneurs, scientists and engineers at a time when our economy needs them most. We must increase the number of skilled workers we admit each year. While we are at it, let's also change how they're selected and where they go.

Much of the debate over immigration focuses on the employment demands of large companies and a reported shortage of skilled workers in certain occupations -- the "skills gap". But two other shortages aren't getting nearly as much attention. Since the recession, we are also seeing alarming declines in entrepreneurship and innovation.

First, new business starts in the U.S. cratered during the recession, and still haven't recovered. Brand-new businesses are creating an average of 200,000 fewer jobs per quarter than they did before the recession. Immigrant entrepreneurs are uniquely suited to reverse this drop. Though they account for less than 15 percent of the population, immigrants start almost 30 percent of new businesses each year.

Second, since 2000 the U.S. share of global patents has fallen from 42 percent to 27 percent. One way to increase innovation is attracting more immigrant scientists. In some key fields, including microbiology and information-technology, more than three-quarters of patents have immigrant inventors. And one 2008 study found that not only do immigrants file patents at a higher rate than natives, they actually increase patenting by their U.S.-born colleagues.

I've seen this policy debate unfold from a unique perspective and understand what foreign talent can mean to a country. Thirty year ago I moved to Japan and then later to China where I started several companies that helped to create jobs and expand economic opportunities. The U.S. could benefit from being more open to foreign entrepreneurs who are eager to create similar opportunities here.

The recently introduced Senate immigration reform bill takes significant steps to boost entrepreneurship and innovation, including creating a new start-up visa and making it easier for scientists to get both temporary visas and green cards. But reformers must grapple with the reality that the current employment-based immigration system that is vastly out of sync with the country's economic needs.

Unlike nearly all of its competitors, the U.S. awards very few greencards (i.e. permanent visas) based on what job skills or capital an applicant can contribute to our economy. Permanent, stable immigration status gives immigrants the time and space to make the risky decision to open a business or file for a patent. That may be why every other major economy, except Japan and Switzerland, welcomes a higher number of permanent employment-based immigrants as a share of its workforce each year than the U.S.

Instead, the U.S. relies on temporary visas. Last year, we issued more than 3 temporary work visas for every 1 employment-based green card. The main visa for skilled workers, the H-1B, is issued to about 120,000 workers per year through employee sponsors.

The problem? The H-1B isn't set up to maximize the economic impact of each visa we award, or advance America's long-term competitiveness. H-1B workers aren't innovating or launching new ventures: we actually prevent them from doing so. Because companies, not the immigrants themselves, "own" the visas, H-1B workers can't leave their employers (to, say, start a new Internet company) without losing their right to stay in the country.

Quick analysis shows it is unlikely that the current crop of H-1B immigrants are filling shortages of U.S. workers. The two most-requested H-1B occupations, computer programmers and systems analysts, have seen wage growth around three percent over the last five years, about the rate of inflation. But if demand for these professions was truly outstripping supply, wages would be spiking.

A small number of companies is responsible for the majority of demand for guest H-1B workers. Almost half of H-1B applications last year came from just 13 multi-national information technology companies, each of which requested over 10,000 H-1B workers, according to U.S. Labor Department data. While H-1B workers do contribute to these companies' bottom lines, few stick around and contribute to the broader economy. Last year, the top 10 H-1B employers asked for just 3 greencards for every 100 H-1B visa requests.

Almost four years after the economy began growing again, the recovery is still coming in fits and starts. Reforms that would re-design the employment-based immigration system so that it puts our economic needs first couldn't come at a more important time.

This Op-Ed originally appeared in the Huffington Post. You can view it here. 

The key to shoring up Social Security may be granting legal status to currently undocumented immigrants. A new study by the Social Security Chief Actuary found that the Senate immigration bill would add $275 billion in Social Security taxes by 2024, just over half of it coming from additional tax payments from the estimated 8 million immigrants who would transition into ‘registered provisional immigrant’ status. The bill would also create more than 3.2 million net jobs and boost GDP by 1.63 percent over a decade according to the study.

A report released by the Heritage Foundation earlier this week has sparked a furious back-and-forth in Washington over the true economic costs and benefits of comprehensive immigration reform. Critics of reform are arguing that adding new immigrants would worsen labor conditions in an already difficult job market, and that a path to citizenship for previously undocumented immigrants would drain government funds and overburden welfare programs.

But the Chief Actuary’s report shows that the Senate immigration bill would increase economic output, and that the subsequent increase in tax revenues would help the federal balance sheet and aid Social Security solvency.

Currently undocumented immigrants would drive most of the increase in government revenues, the report said, because these workers would come out of the underground economy after legalization. Economic studies have shown that legal status increases returns to investments in education, and pushes immigrants into more productive jobs. This would boost tax revenues significantly, the Social Security report affirms. Undocumented workers have already contributed up to 10 percent – or $300 billion – of the Social Security Trust Fund.

The real fiscal benefits of immigration reform may be years down the line. The SSA has not yet estimated the 75-year impact of the immigration bill, but does point out that “the additional births for the increased population under this bill will have substantial positive effects.” Demographers estimate that more than 80 percent of population growth in the next 40 years will come from immigrants and their children – without immigration, the labor force would otherwise begin shrinking around 2015.

On Tuesday, we highlighted five surprising facts about the fiscal impact of immigration reform, including the impact of immigration reform on Social Security.

Congressional Budget Office data released this week suggests the government will hit its “debt ceiling” in October, months later than the June showdown projected earlier this year, as the full impact of the sequester and tax increases is felt.                

But lawmakers shouldn’t take the summer off. There has been almost no effort to make meaningful cuts to the biggest drivers of our long-term deficits. Meanwhile, the short-term deficit cuts that we have put in place are coming at a very high cost to economic growth.

The New York Times reported this morning that a survey of private-sector and government economists revealed the economy would be growing two percentage points faster this year – and unemployment would be one full percentage point lower, at 6.5 percent – if Washington had not instituted the spending cuts and tax increases that have taken effect since 2011. The Fed has explicitly linked its interest-rate policy to a 6.5 percent unemployment benchmark.

Smart fiscal policy would pair careful cutbacks today, while unemployment remains elevated, with more significant spending cuts to major deficit drivers in the medium- and long-term. But, as New York Fed President William Dudley puts it: “Instead, we have nearly the opposite: significant retrenchment in the near-term, but no credible action over the long-term, with partisan divisions and significant uncertainty about what will happen next. Will the sequester, for example, be sustained or not?”

Two charts from the Times show just how austerity is taking its toll: