Congress has just postponed the debt ceiling until December 8 but at least they didn’t repeal it. It is crucial to retain regular and explicit debt ceilings as a reminder of the urgency of putting our debt on a downward course (as a percentage of GDP).
As a reminder:
The debt now stands at 77% of GDP (for the public part on which we pay interest), the highest it has been since right after WWII. The $15 trillion public debt right now is essentially “free” money because interest rates are so low. But interest rates will inevitably return to more normal, and higher, historical levels and, when this happens, interest payments on the debt will skyrocket.
The entitlementprograms of Social Security. Medicare and Medicaid are the drivers of our debt problem because their costs are increasing so rapidly. Medicaid costs the federal government almost $400 billion per year. Medicare costs the federal government $400 billion per year more than it receives in FICA taxes and premiums paid.
The attached chart demonstrates the scope and urgency of the problem. By 2032, just fifteen years from now, all federal tax revenues will be required to pay for Social Security, Medicare, Medicaid and interest payments on the debt. This means that all of ordinary discretionary spending: on defense, various government operations and social welfare programs will be paid for entirely from new deficit spending and, in the process, will almost inevitably suffer huge cutbacks. The lower-income and poor people, who are the most reliant on government programs to get by, will be the most adversely affected.
Conclusion. Such a dreary scenario of drastically tightened government spending does not have to occur. It can be avoided by immediately starting to make sensible curtailments, not actual spending cuts, all along the line. Do our national leaders have the common sense and fortitude to do this?
The readers of this blog know that my favorite topic is our very large national debt, now 77% of GDP (for the public part on which we pay interest) and predicted by the Congressional Budget Office to keep steadily getting worse, without major changes in current policy.
It is also well documented (see chart) that our entitlement programs of Social Security, Medicare and Medicaid are the drivers of the huge annual budget deficits which make the accumulated debt so much worse and worse.
The economist John Cogan has an informative interview in yesterday’s Wall Street Journal explaining why entitlement spending is so difficult to control. First of all, according to Mr. Cogan, only three modern presidents have made any effort to control entitlement spending:
FDR who persuaded Congress to repeal unjustified disability entitlements to 400,000 WWI, Philippine War and Boxer Rebellion veterans.
Ronald Reagan “slowed the growth of entitlements like no other president ever had.”
Bill Clinton’s welfare-reform plan not only reduced welfare’s burden on taxpayers but also benefitted the recipients, whom the old program had been harming.
Mr. Cogan identified three necessary political conditions for any entitlement reform. They are:
Presidential leadership “without which there has never been a significant reduction in an entitlement.”
Significant agreement among the general public and the elected representatives that there’s a problem.
Bipartisan consensus on the solution for correcting the problem.
Conclusion. Think about it. This is a quite a gloomy assessment. Nothing will get done on the primary reason for our huge debt problem without both presidential leadership and bipartisan political support. When is this going to happen?
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?