Category Archives: entitlements

Why Is Obamacare So Unpopular? Because It’s Too Coercive!

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The individual mandate for health insurance, upheld by the Supreme Court a year and a half ago, is now leading to millions of policy cancellations in the individual insurance market.  The mandate overrides any existing policy which does not provide minimum coverage.  The employer mandate, stipulating that any business with 50 or more employees must provide health insurance for all fulltime employees, has caused many businesses to replace fulltime employees with part-timers.
But these are not the only forms of coercion under Obamacare.  As reported in yesterday’s New York Times, “Court Confronts Religious Rights of Corporations”, the Supreme Court is expected to accept a case involving the Hobby Lobby’s refusal, on religious grounds, to pay for insurance coverage for the contraceptive coverage which is required to meet minimum standards.
It would be much better to replace all of these coercive mandates with economic incentives.  This could actually be done in such a way that would also make healthcare less expensive, thereby giving a big boost to our economy.  Here is one way to do this, as I discussed in my November 14, 2013 post:

  • Provide a flat and universal tax credit for health insurance coverage which applies to everyone and not just for employer provided healthcare.  The (refundable) credit would be roughly the amount necessary for catastrophic insurance coverage.
  • Convert Medicare and Medicaid into a means-based addition to this tax credit.
  • Everyone with continuous coverage (paid for by the tax credit) would be protected from price spikes or cancellations if they get sick.  This provides a strong incentive for everyone to buy and retain coverage.

It is entitlement spending which is driving our country’s fiscal crisis.  And healthcare programs such as Medicare and Medicaid make up a big part of entitlements.  In order to get these costs under control, we need to first get the cost of private healthcare under control.  The best way to do this is with economic incentives rather than coercive mandates.
Obamacare doesn’t need to be repealed.  It could just as well be modified and improved as described above.

Nowhere to Cut? II. Are You Really Trying?

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The New York Times has a story today, “A Dirty Secret Lurks in the Struggle Over a Fiscal ‘Grand Bargain’”, suggesting that there are really two reasons why the House-Senate Budget Conference Committee, chaired by Representative Paul Ryan and Senator Patty Murray, is unlikely to accomplish very much.  The simple reason is that the Republicans will not support tax increases, on which the Democrats insist, and the Democrats will not support major changes to entitlement programs, on which the Republicans insist.
But the “dirty secret” (according to the NYT) is that Republicans don’t really want to trim either Social Security or Medicare, which many Tea Partiers receive, and Democrats don’t really want to raise taxes on the upper income individuals who support them.  Furthermore, the deficit for 2013 was “only” $680 billion, and is expected to drop further in the next few years, while interest rates are so low that borrowing hundreds of billions of dollars each year is not expensive.  In other words, just kick the can down the road.  Let somebody else worry about the problem in the future.
My previous post “Nowhere to Cut”, based on the report from the Congressional Budget Office, “Options for Reducing the Deficit: 2014 – 2023”, picks 14 possible budget cuts or revenue enhancements out of a total of 103 such items listed.  Just these 14 items alone amount to a savings of $566 billion over ten years, more than enough to offset half of the entire sequester amount.
For example, raising the eligibility age for Medicare to 67 would save $23 billion (over 10 years), using the ‘chained’ CPI to measure inflation for all mandatory programs would save $162 billion, tightening eligibility for food stamps would save $50 billion, taxing carried interest as ordinary income would save $17 billion, limiting highway funding to expected highway revenues would save $65 billion, reducing the size of the federal workforce through attrition would save $43 billion, limiting medical malpractice torts would save $57 billion, and modifying Tricare fees for working-age military retirees would save $71 billion.  Just these eight savings total $456 billion and would offset almost half of the entire sequester.
What is so difficult about making a tradeoff deal like this?  Isn’t this what we send people to Washington to do?

Beyond ObamaCare: Where Do We Go From Here?

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Last Sunday’s Washington Post has an Op Ed column by Jon Kingsdale, “Beyond Healthcare.gov, Obamacare’s Other Challenges” which describes the many challenges confronting ObamaCare besides just the website problems and the millions of individual policies which will be cancelled for not meeting the minimum requirements of the Affordable Care Act.  Based on his experience setting up the Massachusetts Health Insurance Exchange from 2006-2010, there will  be huge problems in getting enrollment, billing and premium collections working smoothly for such a large government program.  For example, an estimated 27% of those who will be eligible for tax credits under the ACA do not have checking accounts.  How will their monthly premiums be paid and tracked for these people if they’re late?
Considering all of the problems involved in the implementation of ObamaCare, and the fact that it does not really reform our current very costly healthcare system but rather just extends it to cover more people, it makes much sense to move toward real healthcare reform, which will control costs.
A column in today’s Wall Street Journal by Ramesh Ponnuru and Yuval Levin, “A Conservative Alternative to ObamaCare”, lays out several basic features which should be included in a sensible, market oriented approach to healthcare reform.   The principles are:

  • A flat and universal tax credit for coverage which applies to everyone and not just for employer provided healthcare.  The (refundable) credit would be roughly the amount necessary for catastrophic coverage.
  • Medicaid could be converted into a means-based addition to this tax credit.
  • Everyone with continuous coverage (which would be provided by the tax credit) would be protected from price spikes or cancellations if they get sick.  This provides a strong incentive to buy and retain coverage without the need for a mandate.

A market oriented healthcare system like this is not only preferable to all of the mandates and restrictions of Obamacare, it also improves our current system by both expanding coverage to more people as well as controlling costs by giving health consumers (all of us) a much bigger stake in purchasing healthcare.
The United States spends 18% of GDP on healthcare, twice as much as any other country in the world.  Our fiscal stability and future prosperity depend on getting this huge and growing cost under control.  The ObamaCare fiasco provides an excellent opportunity to get started on doing this.

Are Deficit Fears Overblown?

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In yesterday’s Wall Street Journal columnist David Wessel responds too mildly in “Why It’s Wrong to Dismiss the Deficit” to Larry Summers’ view that we should not worry about the deficit.  Mr. Summers says, “Let me be clear.  I am not saying that fiscal discipline and economic growth are twin priorities.  I am saying that our priority must be on increasing demand.”  According to Mr. Wessel, here is the essence of Mr. Summers’ argument:

  • The deficit isn’t an immediate problem; growth is.
  • We’ve done enough (about the deficit) already.
  • The future is so uncertain that acting now is unwise.

Granted that the deficit for fiscal year 2013 is “only” $680 billion after four years in a row of deficits over a trillion dollars each and that interest rates are at an historically low level at the present time.  The problem is that the public debt is now at the very high level of 73% of GDP and is projected by the Congressional Budget Office to continue climbing indefinitely.  Interest on the debt was $415 billion for fiscal year 2013 which represents 2.5% of GDP of $16.8 trillion.  With GDP growth increasing at about 2% per year since the end of the recession in June 2009, this means that interest on the debt is already slowing down the economy and it’s just going to keep getting worse as interest rates inevitably return to higher historical levels.
Growth is very definitely an immediate problem.  But increased government spending is the wrong way to address it.  The right way to address it is with broad based tax reform (lowering tax rates in return for closing loopholes) to stimulate investment and risk taking by businesses and entrepreneurs.  Significant relaxing of the regulatory burden would also help, especially for the small businesses which are responsible for much of the growth of new jobs.  So would immigration reform to boost the number of legal workers.
As uncertain as the future is, we can be quite sure that entitlement spending (Social Security, Medicare and Medicaid) will be going up fast in the very near future as more and more baby boomers retire and the ratio of workers to retirees continues to decline.  It would be very risky indeed to assume that economic growth will increase fast enough to pay for increased entitlement spending.
Conclusion:  large deficits are a very urgent and immediate problem which we ignore at our peril!   Furthermore the best ways of boosting the economy don’t require increased government spending.

Is Expanding The Social Safety Net Compatible With Fiscal Restraint?

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Yesterday’s New York Times addresses this issue with an article “Ohio Governor Defies G.O.P. With Defense of Social Safety Net”.  It describes how Republican Governor John Kasich has maneuvered to expand Medicaid coverage in Ohio to 275,000 low income Ohioans under the new healthcare law, over the objections of his own Republican dominated state legislature.
Mr. Kasich is a former congressional deficit hawk and there is little doubt about his fiscal conservatism.  He recently balanced his state budget by cutting revenues to local government by $720 million.  But he has also expanded state aid for the mentally ill and supported efforts to raise local taxes for improving education.  He says “for those who live in the shadows of life, for those who are the least among us, I will not accept the fact that the most vulnerable in our state should be ignored.”
Especially after the disastrous debt ceiling debate, with Tea Party Republicans willing to default on our national debt in order to defund Obama Care, it is critical for fiscal conservatives to publicly demonstrate that they are not opposed to helping the poor in a reasonable manner, as long as it is cost effective.
To be in favor of controlling entitlement spending is not the same thing as wanting to abolish entitlement programs.  In fact, it is just the opposite.  We must control their costs so that the government will have the means to continue to support them.  It is just plain ordinary common sense.  If our national debt continues to grow unchecked, we risk not only entitlement programs but our entire way of life.
Take Medicaid as a concrete example.  Right now the federal government pays a percentage of the costs incurred by state governments in running the program.  The more a state spends for Medicaid, the greater the reimbursement from the federal government. This increases spending for both the states and the federal government.  A more cost effective approach is to give each state a block grant from the federal government and enough leeway to operate its own program as efficiently as it can.  Exactly this approach is being used in Rhode Island and is working very well at a much lower overall cost.
Being a fiscal conservative is not the same thing as being mean spirited!  The future of our country depends on getting this crucial message out far and wide!

The Intergenerational Financial Obligations Reform (INFORM) Act

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On page nine of today’s New York Times is published a full page letter to Congress and President Obama, “Enact The Inform Act”, signed by over one thousand economists as well as former government officials.  It would require “the Congressional Budget Office, the Government Accountability Office and the Office of Management and Budget to do fiscal gap and generational accounting on an annual basis to assess the sustainability of fiscal policy and measure, on a comprehensive basis, the fiscal obligations facing our children and future generations.
“Unlike the measurement of the official federal debt, fiscal gap and generational accounting are comprehensive.  They leave nothing off the books, be it defense spending, Medicare expenditures, or the profits of the Federal Reserve, in assessing the sustainability of fiscal policy and the size of the fiscal bills being left to our own children.”
The INFORM Act is sponsored by a nonpartisan and millennial driven organization which goes by the name, The Can Kicks Back . This is very significant because it is precisely the younger generation of Americans who should be most concerned about the fiscal irresponsibility of so many of our national leaders.  They are the ones who will be stuck with the huge national debt which is being generated by the profligacy of federal spending and also the ones who may have their own retirement benefits greatly curtailed because of it.
Young people should be especially incensed by such irresponsible behavior which will affect them so greatly.  We should support their efforts to turn around this ugly situation!

When Will Young Obama Supporters Wake Up and See the Light?

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Yesterday’s weekend interview in the Wall Street Journal with money manager Stanley Druckenmiller, “How Washington Really Redistributes Income”, vividly illustrates how disastrous Obama economic policy has been for the young people who form the core of his coalition.  “High unemployment is paired with exploding debt that they will have to finance whenever they eventually find jobs.”
“I thought that tying Obama Care to the debt ceiling was nutty”, says Mr. Druckenmiller. “I did not think it would be nutty to tie entitlements to the debt ceiling because there’s a massive long term problem.  And this president, despite what he says, has shown time and time again that he needs a gun at his head to negotiate in good faith.”
How about the “rat through the python” theory which holds that the fiscal disaster will only be temporary while the baby-boom generation moves through the benefit pipeline and then entitlement costs will become bearable.  Unfortunately for taxpayers, “the debt accumulates while the rat’s going through the python,” so that by the 2030’s the debt and its enormous interest payments become bigger problems than entitlements.  “That’s where Greece was when it hit the skids”, he says.
What is Mr. Druckenmiller’s solution?  Raise taxes on dividends and capital gains up to ordinary income rates and eliminate corporate taxes all together.  This is justified because it ends double taxation of corporate profits.  But, in addition, the people who run the corporations would be more incentivized to invest the profits in growth and expansion.  Ending corporate taxation also ends crony capitalism and corporate welfare.  All of this would be “very, very good for growth which is a good part of the solution to the debt problem long-term.  You can’t do it without growth.”
Bottom line:  we urgently need to rein in entitlement spending but we also need smarter policies to grow the economy faster.  Young people ought to be totally on board with all of this.  When will they wake up and see the light?

Who Won and Who Lost in the Fiscal Stalemate?

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The mainstream media are uniformly agreed that the Democrats and President Obama “won” the latest debt ceiling and shutdown standoff and that the Republicans “lost”.  For example, New York Times, reporter Jeremy Peters gives the GOP a rebuke in “Losing a Lot to Get Little”. “For the Republicans who despise President Obama’s health care law, the last few weeks should have been a singular moment to turn its botched rollout into an argument against it.  Instead, in a futile campaign to strip the law of federal money, the party focused harsh scrutiny on its own divisions, hurt its national standing, and undermined its ability to win concessions from Democrats.”
This is all true and, in addition, the twenty or twenty-five Tea Party stalwarts made fools of themselves by being so intransigent.  And 145 House Republicans ran away by voting against the final deal.
But look at the broader picture.  The federal government has been reopened for just three months, until January 15, 2014, and at current funding levels which include the 2013 sequester spending cuts.  On January 1, the more stringent 2014 sequester cuts take effect.  In other words the pressure is growing on the big spenders in Congress to deal seriously with our ongoing debt and deficit crises.
The big spenders have two options.  They can continue to kick the can down the road (i.e. refuse to bargain and force additional continuing resolutions to keep the government open) as discretionary spending continues to shrink more each year.  Or they can agree to make significant adjustments to entitlements to slow down their rate of growth, in return for easing the sequester cuts.
In a more rational world, the big spenders would understand that cutbacks must be made and the two sides would bargain in good faith and reach agreement.  But fiscal conservatives continue to have the necessary leverage to force compromise, and are unlikely to give it up.
Conclusion: the Tea Party “lost” and fiscal conservatives broke even.  The big spenders didn’t “win” but they got a temporary pass because the Tea Party overreacted and was shot down.

What Is the Best Budget Outcome in the Current Standoff?

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In yesterday’s Wall Street Journal, columnist Holman Jenkins describes “The Best Budget Outcome: Tax Reform”.  His point is that the only way we can possibly continue to pay for our rapidly growing entitlement programs of Social Security, Medicare and Medicaid, is by speeding up the growth of our economy.
All of the various fiscal reforms of these programs which have been suggested such as means testing for Medicare, raising the Social Security wage base ($113,700 in 2013), changing the way the COLA is computed, raising eligibility age limits for both Social Security and Medicare, and block granting Medicaid to the states, can at best slow down the growth of their costs.  This is because the number of retirees is growing so rapidly as well as the number of eligible recipients for Medicaid.
Most sensible people know that we have to do a much better job of controlling the cost of entitlement programs, even though it is tough in practical terms to agree on specifically which costs to rein in.
In addition to holding down the growth of government spending, the other way to shrink the deficit and slow down our soaring national debt, is by speeding up economic growth.  The best way to do this is by lowering tax rates (offset by closing tax loopholes) in order to encourage more entrepreneurial investment and risk taking.
But too many people are ideologically opposed to lowering tax rates because they think that it increases economic inequality.  As Mr. Jenkins says, such people would rather “see the lives of the young and unskilled be blighted by a slow-growth economy than approve a reform of rates and loopholes that …(could be mislabeled)… as a tax cut for the rich.”
In other words, the two sides in the budget debate can probably hammer out some reasonable ways to rein in entitlement spending.  But they probably will not be able to agree on sensible tax reforms which would grow the economy faster and put more people back to work.  What a shame!

A Pessimistic View of America’s Future V. When Wealth Disappears

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Several of my recent posts have been pretty gloomy.  “Average is Over,” “What, Me Worry?” and “The Age of Oversupply,” for example.  Here’s another gloomy one.  The British economist, Stephen King, has an Op Ed column in last Monday’s New York Times, “When Wealth Disappears.”, based on his new book, “When the Money Runs Out.”
Our GDP grew at 3.4% per year in the 1980s and 1990s, then dropped to a growth rate of 2.4% from 2000 – 2007.  Since the Great Recession ended it has averaged barely 2% per year.  The Democrats say we just need more fiscal stimulus and monetary easing to boost the growth rate.  The Republicans say deficit reduction including entitlement reform, slashing regulations and tax reform is what is needed to revive the economy.
“Both sides are wrong,” says Mr. King.  “The underlying reason for the stagnation is that a half-century of one-off developments in the industrialized world will not be repeated.”  These one-off developments are: the unleashing of global trade after World War II, financial innovation such as consumer credit, expansion of social safety nets which reduces the need for household savings, reduced discrimination which has flooded the labor market with women and, finally, the great increase in the number of educated citizens.
What Mr. King recommends is “economic honesty, to recognize that promises made during good times can no longer be easily kept.  What this means is a higher retirement age, more immigration to increase the working age population, less borrowing from abroad (by holding down deficit spending), less reliance on monetary policy that creates unsustainable financial bubbles, a new social compact which doesn’t cannibalize the young to feed the boomers, and a further opening of world trade.”
“Policy makers simply pray for a strong recovery.  They opt for the illusion because the reality is too bleak to bear.  But as the current fiscal crisis demonstrates, facing the pain will not be easy.  And the waking up from our collective illusions has just begun.”
It is obviously time to bite the bullet, lower our expectations, and start doing the hard work needed for even incremental economic progress.