Thesis Defense and USA, Inc.

For those who didn't see the news via other information feeds, I successfully defended my thesis last Friday. It's a wonderful feeling not to have an unfinished thesis hanging over one's head (Alvin, I'm looking at you). The thesis title was "Coherent Approximation of Distributed Expert Assessments." The main idea is that when people (or non-human expert systems, like computer algorithms) try to guess the value of two or more uncertain quantities that are related (like, for instance, the probability that the Red Sox win the World Series and the probability the Cubs win the World Series), they may generate logically irreconcilable estimates. The irreconcilability manifests itself in terms of money pumps, like Dutch Books in distributed probability estimation or market arbitrage more generally. My thesis develops a mathematical method for correcting such errors.

On the subject of USA, Inc., I think now would be a great time to discuss it. I'd love to see it in context of the several budget proposals that are currently being put forward (evidently House Democrats are expected to put out a budget proposal today to counter the Republicans' proposal from last week, and President Obama is also getting in on the game, outlining a proposal in his speech tonight).

I read the executive summary of the report and liked several of the points the author made. Most importantly, I think she accurately pointed out that we need to set reasonable goals for revenues and outlays. For instance, the Ryan budget sets revenue at 18% of GDP, and balances the budget by 1) capping Medicare outlays and indexing them to inflation and 2) turning Medicaid payments into block grants to states and 3) significantly reducing all non-defense discretionary spending. This is about what we should expect if revenue is set to approximately 18% of GDP; the federal government simply can't do all it's been doing with that level of funding.

If, instead, we want to continue funding Medicare, Medicaid and discretionary spending at the current levels we need to talk about how much of revenue that will require. In this case, as Meeker points out, the outlays have been growing faster than GDP, so the revenue side would have to grow faster than GDP. This is obviously unsustainable, which leads me to conclude that any plan that doesn't index entitlement growth to GDP growth (or a surrogate like inflation) is not a serious plan.

There are a lot of nuances that I think could be added to the debate; for instance, during the 1990s (most recent decade I found data on) US healthcare costs rose at about 3%, in line with inflation. The big increases people cite (particularly in cross-national comparisons) seem to have largely happened in the 1970s and 1980s. So are healthcare rates really increasing, or are outlays increasingly primarily because more people are being enrolled (hint: it's the latter). Meeker rushes by this point (at least in the executive summary), but I think it's an important conceptual one to recognize (if it's valid; I don't know that the sparse statistics I've seen thus far justify my assertion).