I began writing this blog in November 2012, right after the 2012 national election when Barack Obama was reelected to a second term as President. Under Obama our biggest problems were: 1) slow economic growth (2% annually since June 2009) and 2) massive and rapidly increasing debt, now 77% of GDP.
After the surprise victory of Donald Trump last fall, my perspective has changed a little bit. Slow growth is still a huge problem. My last several posts have, in fact, focused on the despair of many blue-collar workers who have been harmed by our stagnant economy in recent years.
Mr. Trump was strongly supported by blue-collar workers last fall and clearly wants to help them out. Faster economic growth will accomplish this and President Trump is working with the Republican Congress to get this done through tax and regulatory reform. I’m optimistic that progress will be made along these lines.
But our debt problem has not really been addressed so far by the Trump Administration. James Capretta from the American Enterprise Institute gives a good summary of where we are:
Entitlement Spending is the Problem. In 1972 the federal government spent a combined 4.2% of GDP on Social Security, Medicare and Medicaid. In 2016 spending on these programs was 10.4% of GDP. The Congressional Budget Office predicts that this figure will jump to 13.5% of GDP in 2030 and 15.6% of GDP in 2047 unless current policy is changed.
The Fiscal Consequences of Interest Rate Normalcy. In 2008 when federal debt was at 39% of GDP, federal spending on net interest payments was 1.7% of GDP. For 2017 net interest payments will be just 1.3% of GDP even though the federal has doubled since 2008. This is due to the abnormally low interest rate of 2.3% at the present time. CBO projects that the interest rate on 10-year Treasury notes will rise to 3% in 2019-2020 and 3.6% for the period 2021-2027.
Conclusion. Right now our huge and rapidly increasing debt is almost “free money” because interest rates are so low. This can’t and won’t last. As interest rates inevitably climb to more normal levels, interest payments on the debt will rise precipitously. This will cause much pain by further squeezing spending on many popular programs. The only sane way to mitigate this highly unpleasant prospect is to shrink deficit spending down to zero as quickly as possible.
One of the major problems facing the United States today is the high cost of healthcare. We spend almost 18% of GDP on healthcare, both public and private, almost twice as much as any other developed country. A big reason for the high cost is the low out-of-pocket consumer spending on health services in the U.S.
My last post discusses a general plan, involving catastrophic health insurance and health savings accounts, for getting the overall cost of healthcare under control.
Once we have a handle on the overall problem, we then need to focus on the cost of the Medicare entitlement program for retirees. The problem here is easy to understand. In just 15 years enrollment in Medicare will increase to over 80 million beneficiaries from 57 million today. Likewise there are 3.1 workers per beneficiary today and there will be only 2.4 in 2030 (see above chart).
The second chart demonstrates that Medicare will be the major component of increases in federal spending in the coming years (with the other entitlements of Social Security and Medicaid following right behind).
So the question is: how do we control Medicare spending within the context of overall health-care reform? Here is a proposal from James Capretta of the American Enterprise Institute:
Medicare recipients would receive fixed payments toward the coverage option of their choice, based on their age, income and health status. The traditional Medicare program would be one of the choices. Enrollees choosing less costly coverage options would see a reduction in their premiums.
Premium payments would be comparable to subsidies and tax credits received from the reformed Affordable Care Act.
Privately run managed care plans provide benefits at far less cost than traditional Medicare. Beneficiaries would share in the savings.
Conclusion. It needs to be emphasized as strongly as possible that the point of Medicare reform is to lower costs to both individuals and the government, sa that Medicare can be preserved indefinitely into the future.
Donald Trump was elected to be our next president because of the huge desire for change amongst the American electorate. Many things need changing, but among the most important is our healthcare system. The problem is that we are spending 18% of our GDP on healthcare, twice as much as any other developed country. The Affordable Care Act has increased access to healthcare but does very little to hold down costs. This is one reason why it is so unpopular and needs to be substantially modified. President-elect Trump has nominated Representative Tom Price (R, Ga) to head up Health and Human Services in his cabinet. Rep. Price is an expert on healthcare and is a leading advocate for replacing the ACA with something more workable. He will soon be in position to lead the charge for healthcare reform.
The two American Enterprise Institute scholars, James Capretta and Scott Gottlieb, have some good ideas for what needs to be done.
Provide a path to catastrophic health insurance for all Americans. The idea is that all Americans who do not get health insurance through employers, or Medicare or Medicaid, should be eligible for a refundable tax credit sufficient to pay for a basic level of catastrophic (i.e. with a high deductible) insurance coverage.
Accommodating people with pre-existing health conditions. Everyone who maintains continuous (catastrophic, as above) coverage would be allowed to move from employer coverage to the individual market without facing exclusions or higher premiums based on health status.
Allow broad access to health-savings accounts. There would be a one-time federal tax credit to encourage all Americans to open an HSA to pay routine medical bills. Families typically spend up to 22% less on healthcare after switching to an HSA.
Deregulate the market for medical services. Providers need freedom from regulation to provide packages of services better tailored to people’s needs. Such provider flexibility will further reduce costs through additional marketplace competition.
Conclusion. The major reason why our healthcare is so expensive is because we, as individuals, don’t have enough “skin in the game,” in the sense of paying for routine medical expenses directly out of our own pockets. The reforms outlines above would correct this very problem.
It is well understood that entitlement spending (Social Security, Medicare and Medicaid) is the biggest driver of our very serious long term debt problem. Furthermore the high costs of Medicare and Medicaid can’t be separated from the high cost of American healthcare in general. In other words, getting the cost of national health spending under control is a fundamental fiscal and economic issue. A major reason for this high cost is the tax exclusion of employer provided healthcare. American out-of-pocket spending on healthcare is only 11% of the total as compared to 26% in Switzerland or 52% in Singapore, two examples of countries with efficient free-market systems. Americans have little incentive to hold down the cost of their own care because it is mostly paid for by third party insurance companies.
The Affordable Care Act (aka Obamacare) expands access to healthcare but does nothing to control overall costs. This means that any changes made to the ACA should be aimed at preserving access but making healthcare much more cost efficient. This can be accomplished by
Keeping the Exchanges. The exchanges were set up to expand access for the uninsured and provide subsidies for those who couldn’t otherwise afford health insurance. This is the best feature of the ACA and should be retained.
Repealing the mandatesfor both individuals and employers. Mandates mean that benefits have to be strictly defined, uniform for all, and therefore more expensive. Employers are burdened by extra regulations which affect hiring and growth decisions.
Replacing the employer tax exclusion with a uniform tax credit for all. The credit would be about $2500 per person, the cost of high deductible catastrophic care. Employers could still provide insurance to employees but the tax deduction would be limited to the amount of the tax credit. The self-employed would get the same tax credit and it would also be refundable for those with low-incomes.
The American Enterprise Institute’s James Capretta describes how a transition could be made from the current ACA to such a new system.