From a reader of my blog: I think he is too flawed, self-centered and sociopathic to accomplish much. I believe that tax reform will become tax cuts for the wealthy (no inheritance tax, etc.) and dealing with budget deficits will not happen. I know you think Trump will be contained by the conservative members of Congress. The Republicans seem unwilling to confront him or speak out as long as his base continues to be very loyal. I think he is so wounded now that it will be hard to accomplish much.
Granted that Donald Trump is hopelessly ensnared in controversy and incapable of changing his ways, he still has many opportunities to do something positive. For example regarding our extremely serious debt problem, he could focus on:
Coming up with a budget that reduces the debt path. No one expects the budget to be balanced in one year. Last year’s Republican plan would have taken ten years to get the job done. The important thing is to clearly move in this direction.
Focusing healthcare reform on cost control. Give the Democrats credit for expanding healthcare access with the Affordable Care Act. But now focus on reining in the cost of healthcare in America.
Enacting fiscally responsible tax reform. Most people agree that the tax code is a complicated mess and, especially, that the corporate tax rate is too high. There are many ways to achieve lower tax rates and simplification in a revenue neutral way.
Stop digging the debt hole deeper by just adding new initiatives. There will always be attractive new programs which are worth pursuing. But in adding them to the federal budget, other programs which are no longer effective need to be phased out.
Reforming entitlements such as Social Security, Medicare and Medicaid. These are the big drivers of national debt. Without entitlement reform, all other efforts to restrain federal spending will be insufficient.
Conclusion. There is nothing easy about pursuing the above agenda. Implementing it will be highly controversial with lots of vociferous opposition. It will take strong leadership to push it through. But it represents a huge opportunity for a controversial president to do something worthwhile.
President-elect Donald Trump is on record as favoring tax and regulatory reform in order to speed up economic growth and I have made it clear that this can be accomplished without increasing our debt.
But what is really needed is to grow our economy faster and actually shrink our debt at the same time. It will be very difficult, essentially impossible, to accomplish this with growth alone or even by raising taxes because the magnitude of our debt, 76% of GDP and rising, is so great.
There is really only one way to begin to shrink the debt and this is to get entitlement spending under control. The above chart shows that, without major changes, by 2032 all tax revenue will go towards healthcare, Social Security and net interest. Here is what needs to be done:
Social Security is already paying out $100 billion per year more than it collects in payroll taxes. Its Trust Fund will run dry in 15 years unless major changes are made and all benefits will drop by about 25% when this happens. We need to either increase the eligibility age for full benefits and/or raise the income cap on payroll taxes. These changes can be phased in but the sooner we get started the less painful it will be.
Medicare is an even bigger problem than Social Security. Either we have government rationing, i.e. “death panels,” or else rationing by price meaning some form of premium support. This simply means that we will all have more “skin in the game,” in the sense that we will all have a financial incentive to minimize our own healthcare expenses.
Medicaid should be block granted to the states so that the federal government is not obligated to a fixed match for all state Medicaid expenses. Again, cost control is the object of such a change.
Conclusion. It needs to be emphasized as strongly as possible that the reason for stringent cost control of entitlement programs is to preserve them for posterity, not destroy them. Our prosperous way of life is severely threatened by our unwillingness to recognize this problem.
I’ve been saying for several months that I would endorse one of the two main presidential candidates before the election and that “Donald Trump Should Withdraw from the Presidential Race” because of his personal sleaziness and that, in any case, I could not vote for him.
But it is worse than this. As the Wall Street Journal stated recently, “Mr. Trump would start out with more than half of the country disliking him, and most of his advisors lack governmental experience. Too many blunders or an early recession (especially one caused by trade restrictions) could cause voters to sweep out the GOP Congress in 2018, setting up a return to an all-progressive government in 2020.” In other words the disaster of 2009-2010, when President Obama had a filibuster-proof Congress, could easily happen all over again.
Mrs. Clinton has said that she wants, ”higher taxes, more spending on entitlements, more subsidies and price controls in ObamaCare, more regulations on business, more limits on political speech, and more enforcement of liberal cultural values on schools and churches.” The likely result of such an agenda would be more lost years of slow economic growth. And “the costs of slow growth are corrosive. Flat incomes lead to more social tension and political enmity. The fight to divide a smaller pie would get uglier in a country that once was accustomed to rising possibilities.” This is a highly conceivable result of four years of a Clinton presidency. Conclusion. I am not exactly enthusiastic about Mrs. Clinton. But she is predictable and much less risky than Mr. Trump. As long as the House of Representatives remains under Republican control, which is very likely, Mrs. Clinton will have to negotiate with it to implement much of her agenda. This could conceivably lead to bipartisan progress on such major issues as tax reform and entitlement cost control.
As the presidential election tightens and the likely margin of victory for either candidate continues to shrink, it becomes ever more apparent that we need a bipartisan approach to solving our most basic problems. My last post discusses the need for fundamental tax reform to get our economy growing faster to create more and better paying jobs. Today I remind my readers of the need for better fiscal policies as well to address our massive and steadily deteriorating debt problem.
As the American Enterprise Institute, among many other think tanks, makes abundantly clear, we are spending more and more of our federal budget on entitlements as opposed to all of the many other federal responsibilities which are lumped together as discretionary spending. In other words, the only way to fix our deficit and debt problems is to achieve better control over entitlement spending.
AEI has some excellent ideas on how to do this:
Social Security should move towards providing a universal flat benefit, set at the federal poverty level, for all U.S. residents aged 65 and older. Social Security would then become a guarantee against poverty in old age rather than a scheme for partially replacing pre-retirement earnings for middle and higher earning households.
Health Care. The Affordable Care Act should be replaced with a less regulated system (i.e. no mandates). The federal tax preference on employer plans could be limited to the cost of catastrophic (high deductible) insurance plus a contribution to health savings accounts. Households without employer coverage would receive a comparable tax credit.
Medicare would be converted into a premium support system with a fixed level of support comparable to that provided by employers.
Medicaid would be converted into a block grant program for the states based on the fixed, per capita costs for enrolled populations.
Other Safety-Net Programs should emphasize work as the key to improved economic prospects plus greater state control over resources in order to encourage innovation.
Conclusion. It should be emphasized as strongly as possible that the purpose of entitlement reform is to preserve and strengthen entitlements, not to weaken ordestroy them. Without such action we are headed for a much worse financial crisis than the one we had in 2008-2009 which will put all government social programs at risk.
We are currently living in a high risk fiscal bubble. Low interest rates mean that our enormous and rapidly growing national debt is virtually “free” money. When interest rates return to historically normal (much higher) levels, interest payments on the debt will explode putting us in a precarious fiscal situation.
As I have pointed out in the last few posts, it is the cost of entitlements and, in particular, health care entitlements, i.e. Medicare and Medicaid, which is driving our debt problem. The most effective way to control these entitlement costs is to control overall health care costs by insisting that all of us have more “skin in the game,” meaning that we must pay more of our health care costs directly from our own pockets as opposed to having them paid by third party insurance companies. The latest report from the Congressional Budget Office, just a few days ago, shows that our debt problem is even worse than was projected just a year ago (see above). The second chart (just above) shows the magnitude of the effort it will take to get our debt under control. Just to stabilize the debt, i.e. to keep it from getting any worse than it is right now, will require a combination of spending cuts and/or revenue increases of 1.7% of GDP which amounts to $330 billion in 2016 dollars. Conclusion. We have a huge national debt problem which is only going to keep getting worse until we make somewhat painful changes in federal policy. We have to either restrain spending increases and/or increase taxes by significant amounts. Health care entitlements are the biggest problem area and Medicare is worst of all.
Our two presumptive presidential candidates, Hillary Clinton and Donald Trump, are completely ignoring this grave problem. And indeed their proposed policy initiatives will only make it worse!
Do we have the strength to deal with this dire problem short of another crisis?
My last two posts, here and here, have made the case that:
Our national debt is now 74% of GDP (for the public part on which we pay interest), the highest since WWII, and steadily getting worse. This will create a huge problem in the not so distant future, as soon as interest rates return to normal (higher) levels.
Entitlement spending is the main driver of our increasing debt. The best way to control Medicare and Medicaid spending is to control the cost of health care spending in general.
The overall cost of health care, public and private, in the U.S. is now 17.4% of GDP, much higher than for any other developed country, and is steadily increasing.
The main reason our health care costs are rising so rapidly is that Americans do not have enough “skin in the game.” Health insurance pays for close to 90% of our health care costs so that we pay for very little directly out of our own pockets. This means we have little incentive to pay close attention to these costs.
Christus Health in Dallas and Privia Medical Group in Washington, DC are causing disruption by shifting health care delivery from hospitals to outpatient settings. They are putting in place a number of lower-cost and more consumer friendly options which reward collaboration, performance and a focus on cost and quality on the part of both management and front-line providers. As I have pointed out in previous posts, here and here, several policy changes would help speed up this process of needed change:
The tax exemption for employer provided health insurance should be limited to the cost of high deductible catastrophic insurance with an equal (refundable) tax credit for those without employer coverage. Health Savings Accounts would be encouraged for routine health care expenses.
Affordable Care Act exchanges would continue to operate as at present but without any mandates.
Medicare would provide a fixed level of assistance with which seniors would purchase a private health plan of their own choosing, rather than being open ended as at present. Medicaid. The federal government would give states fixed, per-person payments. Low-income individuals could combine Medicaid and the (refundable) tax credit to enroll in private insurance.
Conclusion. The whole idea is to make everyone, rich and poor, young and old alike, responsible for their own health care expenses. Only with such a consumer-oriented, free-market system will we be able to preserve the high quality of American health care and rein in excessive costs at the same time.
As I indicated in my last post, ”Entitlement Spending and the National Debt,” our national debt is much too high and steadily getting worse. Furthermore, it is entitlement spending, especially Medicare, which is the fundamental driver of our increasing debt. If we don’t solve this problem relatively soon, we will have another financial crisis on our hands, much worse than the last one in 2008. When interest rates go up, as they will sooner or later, then interest payments on our accumulated debt will rise precipitously and threaten to bankrupt the nation. The only effective way to control Medicare costs, however, is to control the overall cost of healthcare in the U.S., i.e. for private healthcare. The above chart shows the nature of this problem. Right now we are spending 17.4% of GDP on healthcare, public and private, and this is predicted to reach 19.6% of GDP by 2024. This is almost twice as much as for any other developed country. The Omaha World Herald had an article on Sunday, “Bending the Curve,” purporting to show that cost increases for total national healthcare spending are dropping (see just above). The problem is that these supposedly low price increases in recent years are still twice the rate of inflation which is now averaging under 2% per year. This means that even 4% – 5% price increases per year are much too high and need to be curtailed even further. The fundamental reason why U.S. healthcare is so expensive is that Americans do not have enough “skin in the game.” The above chart shows that our direct out-of-pocket costs for healthcare have been steadily dropping for the last fifty years as the role of health insurance has expanded. This means that we simply don’t have enough personal incentive to hold down healthcare spending on our own. Conclusion: We have to control entitlement spending, especially for Medicare, to get our national debt under control. But this can only be done by limiting the steep spending increases in overall healthcare, public and private. How will we be able to do this? Be patient, we’re getting there!