Medicaid vs Transit in LA.

In his budget, Obama proposed increased spending on transportation funded largely by tax increases. This naturally raised the ire of Conservatives, who though generally in favor of infrastructure, oppose tax increases.  This also raised the Conservative talking point that welfare spending is consuming the entire budget, leaving very little left over for traditional government spending (also known as "discretionary spending").

The amounts proposed for transportation are relatively small.  As a small-government advocate, I find it mystifying that Obama's administration could not identify even small cuts to welfare spending to pay for this increased spending.  If they had proposed such an exchange, it would have been an easy sell in Congress- a welcomed bipartisan compromise.  So why didn't they propose such a deal?

It's possible that the Administration recognized that a compromise would be welfare-enhancing, but felt that political considerations made it undesirable.  This is unlikely for a variety of reasons and would reflect poorly on the Administration, so let us consider the more straightforward possibility- that Obama does not consider transferring even small amounts from entitlement spending to transportation welfare-enhancing for the nation.

So is the Administration right on this point?  One way of analyzing this is to consider some extreme tradeoffs.  Progressives generally bemoan the state of mass transit so it should be a high-value alternative for welfare spending.  Lets do a thought experiment- what would mass transit in LA look like if we took all the money we spend on Medicaid in LA and instead spent it on mass transit?

In 2013-14 the proposed CA Medicaid budget is $57.4B* (see slide 41).  LA has 40% of CA population, so we can ballpark the LA-specific Medicaid spend as $27B per year**.

How much is $27B?  A lot.  In fact, an enormous amount.  The entire "LA Metro" budget for 2013 was only $4.5B (page 17).  That includes bus, light-rail, subway operating and capital expenses!  Fares on the system came to only $0.35B.  Operating expenses to $3B. So what would the LA transit system look like if it were funded instead of Medicaid?

First, for <2% of Medicaid spending you could make the entire system free.  For another 6% (1.5B) you could increase operating frequency by 1.5x*** making it easier for the poor to get around LA. With the remaining $25B you could buy 25 new miles of subway every year at a bloated $1B/mile cost****.  Not light rail but SUBWAY.  That's more subway miles each year than LA now has in total.  In about 8 years, LA would have more subway miles than NYC.

One other interesting note- transferring this spending from Medicaid to mass transit would also transfer $27B of income/year from wealthy, white-collar medical workers to blue-collar construction and transit workers.

So here's the question- are the poor of LA better off with nearly-free world-class medical care, or with a free, world-class transportation system?

And before you answer, consider the actual revealed preferences of the poor.  In the Oregon Medicaid lottery "experiment", only 60% of those who won the lottery actually bothered to fill out the enrollment forms!  And only 30% ended up enrolling.  It's true that some of those eligible for the lottery might no longer be eligible once notified, either because they found a job, or perhaps moved out of state.  Reasonable estimates for this percentage are quite low though.  The vast majority of those who didn't enroll are presumed to have not done so because they could not be bothered.  The value of Medicaid to them wasn't high enough to deal with the paperwork!

I don't intend this as a polemic against Progressives.  Rather, I think think they are making an honest mistake.  First, they are conflating "cost" with "value".  That is, because Medicaid costs $27B to run in LA, it must be worth $27B to the recipients.  Second, most voters and politicians have no sense of scale.  How often have you ever seen the budgets for an awesome public transit system and a health care system for the poor compared?

For me, the general lesson of this exercise is- we really are starving infrastructure spending due to entitlements.  In fact, we are doing this in ways that make absolutely no sense.  The tradeoffs involved cannot possibly be good for the recipients.  Perhaps the gains to compromise here are so large that a political deal can be worked out.

* I'm a bit uncertain about this figure.  I first derived this stat another way by looking at CA cost per enrollee then multiplying by the size of enrollment.  By this estimate, the spending is only $30B/year.  I chose the $57B number since it's a direct number from government budget slides and it also jibs much better with national Medicaid spending numbers.  My best guess is the CA cost per enrollee omits the Federal component of the spending which is why the number comes out wonky.

 

** It's probably more than $27B as LA is both poorer and more expensive than other parts of the state, but we're just ball-parking things here.

*** The assumption is that by increasing operating costs by 50% you can increase frequency by 50%.  I believe this to be a very pessimistic estimate since there's a lot of overhead that doesn't need to be increased (it doesn't cost 50% more to run a subway station with 50% more trains).  And there are economies of scale with more spending (for instance, you can buy off the Unions by promising to hire more workers instead of higher wages). 

Also, I realize you can't just turn money into subway miles- there are time and planning issues, etc.  There is some deferred gratification, but it doesn't affect the underlying tradeoff math.

**** PedestrianObservations notes that the LA "subway-to-the-sea" is projected to cost $500M/mile.  In the interests of showing real tradeoff opportunities, I've doubled that cost to approximate what it will probably actually cost.