Category Archives: Congress

The President’s Budget

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The Administration has now released its own budget, “Obama Makes Budget Gamble”  as reported by the Wall Street Journal on Thursday, April 11, 2013.  We now have three budgets to compare with each other, from the House Republicans and the Senate Democrats as well as from the President.  Not surprisingly the President’s budget is very close to the Senate’s for the entire ten year period ahead, both in year-by-year spending totals as well as revenue projections.
The President’s budget shrinks the deficit from 5.3% of GDP for 2013 to 4.4% for 2014 and down to 1.7% in 2023.  But just retaining the sequester level of spending for next year, as the Republicans propose to do, with no other cuts, would lower the deficit level to 3.7% of GDP for next year.  And, of course, the Republicans propose to entirely eliminate the deficit by 2023.  Shrinking the deficit to 1.7% of GDP by 2023, as the Democrats propose to do, sounds good on the face of it, but it means a deficit of over $400 billion still remains ten years out.  Bottom line: both the Administration and Senate budgets increase the debt by about $5 trillion over the next ten years, making no attempt to eliminate the deficit, compared with a Republican increase of $1 trillion in debt by 2023 while finally ending our awful slide into deeper debt.
The President’s budget does have some good features such as changing the way the Consumer Price Index is computed, to make it more accurate, which could save $339 billion over ten years.  The administration suggests additional means testing for Medicare recipients so that the more affluent would pay higher premiums than at present (significant but unknown savings).  Limiting tax deductions for the top 3% of taxpayers to 28% of income would generate $529 billion over ten years.  Taxing all incomes over $1 million at the minimum rate of 30% (The Buffett Rule) would raise an additional $53 billion over ten years.
The problem is that all of these spending cuts and tax increases in the President’s budget would go to new spending rather than deficit reduction.  Tax reform, with a tradeoff between lower rates and fewer deductions, would give a big boost to the economy.  But just raising taxes in order to increase spending neither helps the economy nor lowers the deficit.  The President is again failing to provide leadership on our most critical problems.
The job of providing national leadership on economic and fiscal issues thereby goes by default to the Republican majority in the House.  This is a very big responsibility for John Boehner and company.  But they’re doing a remarkably good job so far under very trying circumstances!

Why Medicare is Such an Enormous and Urgent Fiscal Problem, II

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The National Institute for Health Care Management has just issued a report, “Health Entitlement Spending: A Story in Six Charts”, which describes in great detail why federal health care spending is such an enormous fiscal problem.  First of all, health care spending is already 21% of total federal spending in 2012.  This spending will more than double in the next ten years.  Annual Medicare expenditures are already double the revenue received from the Medicare Part A Payroll Tax and premiums paid by Medicare recipients.  This gap will continue to steadily widen in the coming years because recent retirees will only pay in total a small fraction of their lifetime benefits.
Every year since 2006, the Medicare Trustees have issued a determination of “excess general revenue Medicare funding”.  By law the President must respond by submitting legislation to correct the problem and Congress must likewise respond on an expedited basis.  But no corrective action has been taken so far.
All federal programs should operate efficiently and much can and should be done to achieve greater efficiency across the whole spectrum of federal programs.  But Medicare is the “sine qua non”, (without which, nothing) for spending reform.  Nothing else matters unless we can get Medicare spending under control.
One way would be to raise Medicare Part A taxes for everyone and also raise premiums for well-to-do Medicare recipients.  And then we’d still have to severely restrict Medicare benefits.  This would be drastic action indeed.
Another way is to give (refundable) tax credits to everyone who applies for Medicare and let them find their own insurance coverage on the private market.  This would create a huge incentive for recipients and their families to pay close attention to health care costs.
Each of the above alternatives would bring radical changes to our Medicare system.  But either we act now in a deliberate, and hopefully rational, manner or else our national debt will grow so rapidly that there will be a new fiscal crisis much worse than what happened in 2008.
Which of these three scenarios do we prefer?  Right now we have a choice!

Why Medicare Is Such an Enormous and Urgent Fiscal Problem

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An article in today’s (April 4, 2013) New York Times, “Misperceptions of Benefits Make Trimming Harder”, explains why Medicare is such an enormous and urgent fiscal problem for the federal budget.  The article points out that an average single male who retired in 2010 will receive more than $100,000 in Medicare benefits in excess of what he pays into Medicare in taxes before retirement and premiums while receiving benefits.  The gap is projected to grow for future retirees.  Too many people are not aware of this huge discrepancy between what they pay into Medicare compared to the benefits which they will draw out after retirement.
According to the reporter, Democratic leaders, including the President, are aware of this funding gap but are unwilling to discuss it publicly.  Instead they take the easy way out by criticizing Republicans who do want to address the problem in a responsible manner.
The problem is so serious that trims around the edges, such as means testing and/or higher premiums for affluent retirees, will not accomplish anything more than making a small dent in the funding gap.  Raising taxes will not get the job done either because they would have to go up too much and too often as the problem keeps getting worse and worse.
The only way to really solve the problem is to control the costs of Medicare (and more generally for all of health care).  There are two basic ways to do this.  One way is to have a government run single payer system with very strict rationing.  The other way is to make everyone, including seniors, financially responsible for their own health care, with subsidies for people with low incomes.
The challenge for Republicans is to frame this basic choice as clearly and vividly as possible.  The American people must come to realize that the status quo in health care cannot continue.  If this message can be delivered effectively to the broad public, I am confident that a majority of people will want a free market system with choice rather than severe government rationing.

We Should Take David Stockman Seriously

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In the March 31, 2013 edition of the New York Times David Stockman has an opinion piece entitled “Sundown in America” in which he says that “eight decades of borrowing, spending and money-printing by the government have bankrupted America” and that “these policies have brought America to an end-stage metastasis.  The way out would be so radical that it can’t happen.”
Although he exaggerates and overhypes with vivid language, I believe that he is basically correct about the gravity of our current predicament.  We should take him seriously because many of his proposed solutions are on the right track even if they are unnecessarily extreme.
For example, he berates the House Republicans for giving Social Security and Medicare a ten year pass instead of wanting to reform them right away.  Of course it would be better to reduce benefits to affluent seniors immediately but it will take bipartisan cooperation to accomplish this, and the Democrats are dragging their feet on entitlement reform.
Mr. Stockman’s strongest language is directed at the finance industry.  He wants to rein in the big Wall Street banks by cutting off their access to cheap Federal Reserve loans and deposit insurance.  The Glass-Steagall Act would be reinstated.  The central mission of the Federal Reserve should be restored: “to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy.”
Is our situation as hopeless as Mr. Stockman says?  Interestingly, he provides evidence that we may have turned the corner in the right direction.  His chart “Indebtedness Dwarfs the Economy” shows that total debt owed by government, companies or individuals, as a percentage of GDP, started dropping about three years ago.  What we need to do is make sure that we keep this total debt measure moving steadily downward for the indefinite future.

The Spending Crunch

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In the March 26, 2013 edition of the Wall Street Journal, the nonpartisan columnist Gerald Seib makes a very astute observation, namely that “Liberals Face Spending Dilemma”.  The Republicans are beating the drums for a balanced budget, the economy is growing at the anemic rate of 2% per year and entitlement spending is growing much more rapidly than this.  So what is going to happen?  Discretionary spending is going to have to shrink!   This means a big hit for both defense and nondefense discretionary spending, meaning most of the traditional programs funded by the federal government.
How do we get out of this predicament?  The best way would be to make the economy grow faster but this is unlikely to happen while the Democrats control the executive branch and are unwilling to implement pro-growth policies such as tax reform, deregulation and stepped-up international trade.
But even with more business friendly pro-growth policies, entitlement spending is growing way too fast and eating up a larger and larger piece of tax revenues.  The Republicans want to control the costs of Social Security, Medicare and Medicaid but simply cannot get this done without Democratic cooperation and support.  Either Democrats help figure out how to make significant cost cutting changes to entitlements or else steep cuts in discretionary social spending will have to be made.
The Republican drive to rapidly shrink deficit spending down to zero is for real and will not be denied.  The sooner the big spending liberals figure this out and adjust their behavior, the better off will be the whole country.

Are the Democrats Really Serious?

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In the March 18, 2013 edition of the Wall Street Journal, longtime Democratic party activist, Ted Van Dyk, essentially asks the above question in his op-ed column, “My Unrecognizable Democratic Party” . Mr. Van Dyk gives many examples of the lack of seriousness of the current national Democratic leaders.
One glaring example which he omits is the enormous difference between the recently proposed House Republican budget, which eliminates deficit spending over a ten year period, and the Senate Democratic budget, which makes no such attempt or even expresses any interest in doing so. The proposed Democratic budget actually increases the national debt by $5 trillion over the next ten years and ends the decade with annual deficits of over $500 billion dollars (see my previous post).
We have added $6 trillion in national debt over the past five budget years, 2009 – 2013, and the Democratic Senate proposes to add another $5 trillion over the next 10 years, with no end in site! How irresponsible can you be! How will this enormous new debt ever be paid off? What will happen when the Federal Reserve is forced to raise interest rates to combat the inevitable inflation which will arise from prolonged quantitative easing? When our public debt reaches $20 trillion, which will soon happen under Democratic budgeting, even an interest rate of 5% will require $1 trillion of interest payments per year forever!
It doesn’t take a lot of common sense to understand the painful fate awaiting our country if this scenario plays out. It is no consolation to predict that a conservative revolution will sweep across the country as a reaction to such irresponsible behavior from the Democrats. It would be far better for Democratic leaders to wake up and address our dire fiscal predicament before it gets even worse. Will this happen? Will Democrats heed Mr. Van Dyk’s warning? Let’s hope so!

Comparing the House and Senate Budgets

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The Republican House of Representatives and the Democratic Senate have each in the past few days issued 10 year budget proposals.  The Heritage Foundation has neatly and dramatically summarized the huge differences between these two budgets and the visions they convey for the future of our country in the coming years.

By limiting the growth of spending to 3.4% per year for the next ten years, the Republican budget shows that it will be possible to shrink the deficit down to zero by 2023 and restore the sound fiscal policies which have guided our country for most of its history.  On the contrary, the Democratic budget projects 5% increases in spending for the next ten years and ends the next decade with annual deficits in the neighborhood of $600 billion.

In other words, a little bit of fiscal restraint, i.e. holding year-to-year spending increases to 3.4%, is all that it will take to get the U.S. back on a sound fiscal track.  What is so difficult about achieving such a common sense approach to budgeting?  If the Obama administration, or perhaps the Senate majority, wants to start new programs on early childhood education or green energy research, for example, then all it has to do is reduce spending elsewhere in the federal budget now approaching $4 trillion annually.

Fundamentally, in the final analysis, adopting a reasonable budget and sticking to it, is a moral issue.  Living within one’s means is such basic and transparently obvious good sense that the advocates of such a policy will ultimately prevail.  For the time being at least, the Democrats are ceding the high ground to the Republicans.

What are the Economic Effects of Immigration Reform?

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Mr Argeo Cellucci and Stephen Kelly have recently (WSJ on March 10, 2013) made a very interesting proposal for immigration reform: “Taking a Nafta Approach to Immigration”.  The North American Free Trade Agreement, starting in 1994, has boosted trade between Canada, Mexico and the United States by over 400%.  Their proposal is to give unrestricted visas to all American, Canadian and Mexican citizens to live and work anywhere within the borders of our three countries.

Enacting such a plan would mostly solve our long simmering immigration problem overnight.  It does not offer citizenship for illegals in the U.S. and therefore is not amnesty.  Our current illegals with Mexican citizenship would attain legal status with visas but would still have to apply for, and wait for, citizenship through ordinary channels.

But the main reason for making such a change in immigration policy is economic, rather than to ease law enforcement or border control problems.  The scholar Raul Hinojosa-Ojeda has recently demonstrated in “The Economic Benefits of Comprehensive Immigration Reform”  the huge benefits that would ensue from such a policy change.  It would boost U.S. GDP by at least .84% annually which means that our slow recovery from the recession of about 2% GDP growth per year would increase by 50%.

Faster economic growth is the elixir our country badly needs to not only provide more jobs but to enable us to rapidly shrink deficit spending at the federal level and restore our national government to sound fiscal health.  Here’s how we can do it!

Why is Healthcare so Expensive?

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Time Magazine has just published its longest article ever, a 25,000 word piece by Steven Brill, entitled Bitter Pill: Why Medical Bills Are Killing Us.  The article contains one example after another of outrageous medical bills being charged to people who are the least able to pay, either the indigent or the uninsured.  Mr. Brill’s solution to this horrible mess is for the government, i.e. the bureaucracy now being expanded by the Affordable Care Act, to do a much better job of using its clout to control costs.

But there is another point of view about what is wrong with our healthcare industry and what can and should be done to make it far more efficient and enable it to provide us with quality care at a much lower cost.  David Goldhill provides a roadmap to a consumer-driven healthcare system with his new book, Catastrophic care: How American Health Care Killed My Father and How we Can Fix It. 

Mr. Goldhill’s proposal is to introduce true competition, not quasi competition dictated by over-burdensome bureaucratic rules, into the American healthcare system.  In other words, let the marketplace figure out what works best by trial and error, rather than expecting even the brightest and most well-meaning experts to be able to figure it out a-priori.  There would still be massive government sponsored programs, such as cradle-to-grave catastrophic insurance and mandatory health accounts, to provide universal care for all.  But the myriad details would be left to the consumers and providers of healthcare to work out over time.

The healthcare crisis in the United States is not just about controlling the rapidly increasing costs of Medicare and Medicaid, as serious as this problem is.  It is also about controlling the costs of private healthcare which is retarding the growth of prosperity for the entire middle class.  Fundamentally we have two basic ways to proceed. We can either move toward a single payer government run program, like much the rest of the developed world, or we can set up a minimally controlled (to insure universal access) system where each of us has the primary responsibility for our own health.

Is There a Need for Urgency in Fixing Medicare?

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In the February 27, 2013 edition of the New York Times the economics analyst Eduardo Porter writes that “Medicare Needs Fixing but not Right Now”. He shows that cost increases have slowed down recently and that there are huge disparities between Medicare reimbursement rates as well as hospital utilization rates by Medicare enrollees in different parts of the country.  Therefore we should first focus on operating Medicare more efficiently before making big changes in its finances.

But a recent study by Michael Chernew, Richard Frank and Stephen Parente, “Slowing Medicare Spending Growth: Reaching for Common Ground”, points out that historically Medicare costs have been growing much faster than GDP.  And now, with demographic pressure from retiring baby boomers, the only way to stabilize Medicare costs as a percentage of GDP, will be to hold per-beneficiary cost increases below the overall rate of GDP increase.

Chernew, Frank and Parente also point out that there are many similarities between the Republican voucher plan for cost control and the Democratic proposal to move away from the fee for service model to either a fixed payment per episode model or global payment per beneficiary model.  A voucher plan shifts responsibility for cost control to beneficiaries and their insurers while the global payment model shifts this responsibility to providers.

Conclusion: yes, it is an urgent matter to slow the growth in Medicare costs and also, yes, there is lots of common ground between the two parties in getting this done.  So let’s insist that our national leaders take Medicare reform seriously and accept no excuses for further delay!