What Would Rudy Say?

A college professor once described what he called the “Rudy’s Test” to his class.  The Rudy’s test involves going into Rudy’s (a bar) sitting down next to any guy at the bar, and asking them their opinion about a proposed policy.  Typically, the professor said, the Rudy’s Test would reveal what the policy would really do.  Many times, the average man’s common sense view of government will provide a simple, clear insight into public policy.

One current statement that fails the Rudy’s Test is that health care reform is going to save us money.  As Saturday Night Live satirically noted, “How exactly is extending health care coverage to 30 million people going to save you money?”

The savings in the health care bills are predicted over the course of the next 10 years.  These predictions are derived by comparing the projected savings with the projected costs of health care reform.  This approach is flawed on both sides.  Government routinely fails to predict how much an entitlement will cost, and also fails in predicting exactly how much a new tax can gather in terms of revenue.

A recent Washington Times story shows fairly conclusively that government economists and bureaucrats do not possess the gift of prophecy.  In 1965, Medicare’s hospital insurance program was estimated at 9 billion dollars.  The actual cost of the program was 67 billion dollars.  In 1987, Medicaid’s projected cost was less than 1 billion dollars.  The actual cost of the program was 17 billion dollars.  In 1993 the cost of Medicare’s home care benefit program was projected to be 4 billion dollars.  The actual cost of the program was 10 billion dollars.  These are only a few examples of how estimated and actual costs are rarely consistent.  There are many reasons for this, as Michael Cannon points out in his article on Medicare Part D cost overruns, including the facts that politicians intentionally conceal costs (accurate in this case because the “doc fix” of Medicare reimbursements, which will cost an estimated 250 billion dollars, has been moved into another bill), that people alter their behavior to maximize the benefits of an entitlement, and that Congress often later expands programs.  I would add a fourth item to this list; that politicians and economists simply do not have the detailed knowledge of every human being in America to be able to predict the future.  In a complex economy filled with rational actors, no economic projection can ever truly capture the future.  There are simply too many parts moving independently of each other to boil down the human behavior of 300 million people into an accurate mathematical formula.  Cost estimates simply cannot be accurately predicted with any regularity.

Further, income estimates are impossible to predict.  Take, for instance, the cosmetic surgery tax included in the Senate’s health care reform proposal.  A similar tax has been instituted in New Jersey, and has been such a failure at bringing in the amount of revenue expected that the assemblyman who first introduced the tax in 2004 introduced a measure to repeal it in 2006.  At the time of it was enacted, the tax was estimated to generate 24 million dollars.  It actually generated 6.8 million dollars.  We have tried this kind of tax before, and it simply doesn’t work the way it is expected.  No doubt the amount of revenues expected by the Obama administration from a host of new taxes will be lower than expected.

Always think about the Rudy’s Test when considering a new policy.  If it sounds too good to be true, it probably is.