Why America is Going Broke

Posted on March 11, 2018 by jackheidel

I am a candidate in the May 15 Nebraska Republican Primary for the U.S. Senate because the incumbent, Deb Fischer, is ignoring our enormous and out-of-control national debt. In fact she recently voted twice to make it worse.
The new tax law, in spite of its good individual features, increases our debt by $1 trillion over the next ten years, even after new growth is taken into account. The new budget agreement increases spending by hundreds of billions of dollars. Fischer voted for both of these measures.

The Hoover Institution analyst, John Cogan, summarizes our dire fiscal situation in the above chart which compares three major categories of federal spending since 1950: defense, entitlements and all other. Entitlement spending is steadily increasing. The other two categories have stabilized at about 3.5% of GDP each.
The Manhattan Institute scholar, Brian Riedl, explains why this situation is so serious that it is already an emergency:

Between 2008 and 2030, 74 million baby boomers, will retire into Social Security and Medicare, at the rate of 10,000 per day.
Today’s typical couple has paid $140,000 into Medicare and will receive $420,000 in benefits, largely because physician and drug benefits are not prefunded with payroll taxes (only hospitalization is). Social Security recipients also come out way ahead.
The demographic challenge is much worsened by rising healthcare costs.
The imbalance is so large that something has to give. Doubling the top tax rates of 35% and 37% to 70% and 74% (I.e. taxing the rich) would only cover 1/5 of the long term shortfall in revenue. An increase in inflation (purposeful or not) will not dilute away our debt. Social Security and Medicare benefits are also tied to inflation. Faster inflation would also increase interest rates and therefore interest payments on our rapidly growing debt.
Restructuring cannot wait. Every year of delay sees 4 million more baby boomers retire and get locked into benefits which will be difficult to alter. “Reality will soon fall like an anvil on Generation X and Millennials as they find themselves on the wrong side of the largest generational wealth transfer in world history.”

Conclusion. A severe form of fiscal cancer is gradually creeping over the body politic. We ignore it at our grave peril.

Why Medicaid Needs to Be Reformed

Posted on September 8, 2016 by jackheidel

One of the very most serious problems facing our nation is our massive federal debt, now over $13 trillion (the public debt on which we pay interest), or 75% of GDP, the highest since right after WWII, and predicted by the CBO to keep getting worse unless major policy changes are made.
The main contributors to this rising debt are the big three entitlement programs of Social Security, Medicare and Medicaid. All three need substantial reforms in order to rein in spending.
Today I will discuss Medicaid, based on an excellent analysis performed by the Manhattan Institute’s Oren Cass, “Over-Medicaid-Ed: how Medicaid distorts and dilutes America’s Safety net.”
Consider these pertinent points:

Badly designed incentives for Medicaid expansion. Each state sets the size of its Medicaid program and receives matching federal dollars, from $1 to $4, for every dollar spent. States thus have a strong incentive to overinvest in Medicaid, expanding their programs far beyond the point where a marginal dollar of their own spending produces a dollar of value.
Health care dominates safety-net spending. During 1975 – 2015, government social spending per person in poverty more than doubled (in constant 2015 dollars) from $11,600 to $23,400. Rising health care expenditures accounted for more than 90% of that increase.
Medicaid spending in 2012 was 39% higher than if it had remained a constant share of state budgets since 2000. State spending on education and welfare was 9% and 54% lower, respectively.
This allocation is an ineffective poverty-fighting strategy. While the majority of government social spending goes to health care, low-income households not enrolled in Medicaid allocate less than 10% of their spending to health care. Studies consistently show little or no positive impact on health outcomes from Medicaid enrollment.
How to strengthen America’s safety net. The federal government should consolidate all antipoverty funding streams, including Medicaid, and allow states to design programs and allocate funding to such programs as states see fit.

Conclusion. The above program outlines a way to both improve the effectiveness of social welfare spending and curtail its costs to both states and the federal government. Let’s do it!

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Social Inequality vs Income Inequality

Posted on October 1, 2015 by jackheidel

There is today in the U.S. much concern about income inequality and I have devoted many posts to this topic recently such as “Are economics and Social Progress Related to Each Other?”, “How to Expand Economic Mobility”, and “Richer and Poorer.”
The above CBO chart shows that income inequality has not changed much in the last 30 years once government transfers and federal taxes are taken into account. Along the same line, the Manhattan Institute’s Oren Cass makes a strong case in, “The Inequality Cycle,” that Americans should be paying at least as much attention to the social aspects of inequality as to the economic aspects.
For example:

As Charles Murray shows in “Coming Apart,” (http://www.amazon.com/Coming-Apart-State-America-1960-2010/dp/030745343X) the upper class has remained stable with respect to marriage rates (94% in 1960, 84% in 2010), civic involvement, and trust in society while for the lower class marriage rates (84% in 1960, 48% in 2010 and dropping), civic involvement and public trust have all declined significantly.
Children in the lower classes are five times more likely to face abuse, violence, addiction and the death or imprisonment of a parent.
By the time they reach kindergarten, 72% of middle class children know the alphabet compared with only 19% of poor children.
The fraction of children with a single parent is the best predictor of upward economic mobility in a particular region, whereas the level of income inequality is not a significant predictor.

Mr. Cass suggests that public policy should focus on these social problems at least as much as on income inequality. For example:

Education reform should be focused on both ends of the K-12 spectrum: early childhood education to ensure that all children are ready to learn when they get to school and better vocational education in high school so that graduates can find a good job if they’re not going to college.
Remove onerous regulations on the workplace so that employers are not pushed unnecessarily into independent contractor arrangements.
The federal government should be more supportive of marriage (e.g. with tax policy), and the participation of religious organizations in the delivery of public social services (to improve their quality).

Conclusion: Being poorly raised does more to cut off opportunity than being raised poor.

Smaller Faster Lighter Denser Cheaper

Posted on September 1, 2015 by jackheidel

I look at a lot of books and every once in a while I find one that I really like. Such is the case for “Smaller Faster Lighter Denser Cheaper” by Robert Bryce, a scholar at the Manhattan Institute.
The book starts out: “We are besieged by bad news. Climate change, pollution, famine, water shortages, war and terrorism, the mess at Fukushima, political gridlock, and the ongoing debt problems and economic malaise in Europe and the United States are dominating the headlines.” This leads some people to embrace “collapse anxiety,” the feeling that our problems are so great that our prosperous Western lifestyle cannot be sustained and soon may crash.
“This pessimistic worldview ignores an undeniable truth: more people are living longer, healthier, more peaceful, lives than at any time in human history. Amid all of the hand wringing over climate change, etc. the plain reality is that things are getting better, a lot better, for tens of millions of people around the world.”
“Dozens of factors can be cited for the improving conditions of humankind. But the simplest explanation is that innovation is allowing us to do more with less. We are continually making things Smaller Faster Lighter Denser Cheaper.” Computers are becoming smaller and faster. Nearly everything we use is getting lighter. Our engines and farms are getting denser. Innovators are driving down costs and making goods and services cheaper.
For example, how does the SFLDC perspective apply to energy use?

In July 2012 blackouts hit northern India leaving 600 million people without electricity, even though India’s coal use doubled between 2002 and 2012. India relies on coal for 2/3 of its electricity production and has enough coal reserves to last a century. In India and worldwide, coal use will almost surely continue to increase.
Consider the following power densities (footprints) of various forms of energy:
i) biofuels: .3 watts per square meter
ii) wind energy: 1 watt per square meter
iii) solar photovoltaic panels: 6 watts per square meter
iv) oil well: 27 watts per square meter
v) natural gas: 28 watts per square meter iv) nuclear plant: 50 watts per square meter

Conclusion: From a power density point of view biofuels are a very inefficient source of energy and wind energy isn’t a whole lot better.
What is the best energy policy going forward? Stay tuned!

How to Expand Economic Mobility

Posted on June 11, 2015 by jackheidel

My blog addresses the three main economic and fiscal issues facing the U.S. today: slow growth, economic inequality and massive debt. Today I focus on inequality by referring to a recent article by the Manhattan Institute’s Scott Winship, “Up: Expanding Opportunity in America.” Mr. Winship observes that there has been little change in upward mobility over the past three generations. Furthermore the U.S. has upward earnings mobility rates quite comparable to Canada and the Scandinavian countries, which are generally regarded as having strong economies.
Nevertheless he makes several suggestions for attempting to boost upward mobility in the U.S. as follows:

Proposal 1: Wage War on Immobility through an Opportunity, Evidence and Innovation Office and an Opportunity Advisory Commission. OEIO would fund and evaluate an array of demonstration projects at the state and local levels. It would consolidate many already existing programs and have a budget of $20 billion per year.
Proposal 2: Experiment with Promising and Innovative Approaches to Mobility Promotion. Examples are: text-messaging strategies such as READY4K, Language ENvironment Analysis, and Converting Large Schools with High Drop-out Rates into Small Personalized Schools.
Proposal 3. Block-Grant Means Tested Programs and Send Them Out to the States. Such a proposal has recently been made by the House Budget Committee.
Proposal 4. Encourage Employment through Work Subsidies. This is already being done with the Earned Income Tax Credit.
Proposal 5. Encourage Delayed and Planned Childbearing through Tax Incentives. The idea is to promote marriage by expanding the current Child Tax Credit of $1000 per child for single parents to perhaps $4000 per child for married parents, but for low-income families only.
Proposal 6. Reform the Social Security Disability Insurance Program. The share of adults age 25 to 64 receiving SSDI benefits has tripled from 1.6% in 1970 to 5% in 2010. Reform of this program would put many able-bodied men and women back to work and save lots of money, some of which could be used to fund the above programs.

Conclusion: Increasing upward mobility is one very good way to combat economic inequality. Mr Winship provides an excellent discussion of several new as well as already established ways of accomplishing this goal.

How to Fix Disability Insurance

Posted on June 9, 2015 by jackheidel

The Trust Fund for Social Security Disability Insurance will run out of money by the end of 2016. If no changes are made, all SSDI benefits will have to be reduced to 81% of scheduled benefits after that. Congress must act to avoid this outcome. The easiest fix would be to merge SSDI into the larger Social Security program in which case both SSDI and SSI would run out of money about 2033.
But as the Manhattan Institute’s Scott Winship points out in National Affairs, “How to Fix Disability Insurance,” “the looming insolvency of the SSDI Trust Fund offers a rare opportunity to fundamentally reform SSDI” to better target assistance to those with debilitating impairments who truly need this support. The share of adults age 25 to 64 receiving SSDI benefits has tripled from 1.6% to 5% between 1970 and 2010 during a time when a shift from manufacturing, agriculture and mining to service work has reduced physical demands on workers.
Mr. Winship suggests the following reforms be implemented in the SSDI program:

Raise the 1.8% (out of the total 12.4% of the payroll tax going to SS) going to SSDI slightly to solve the immediate problem.
Expand the support options available to able-bodied men and women who can work, at least for a significant number of hours.
Reduce the number of people applying for benefits. For example, by increasing employer incentives for taking stricter safety measures, accommodating and rehabilitating those who become disabled and making greater use of claims management.
Use a stricter definition of disability. For example, mental and musculoskeletal conditions may be amenable to treatment.
Make it less attractive and more difficult to receive benefits for those who, while impaired, are able to work. Conditions likely to improve would be automatically subject to review after a short period of time.
Facilitate work among those with serious impairments who would still like to work. The point here is to make sure they benefit from working without feeling threatened with possible termination of benefits.

The point is that there are many practical steps which can be taken to make SSDI more cost efficient while preserving it for those who truly need it. This is a good example of the sort of changes that need to be made in all entitlement programs to shore them up for future generations by bringing their huge costs under control.

Why Is American Healthcare So Expensive?

Posted on April 21, 2015 by jackheidel

The U.S. spends almost 18% of GDP on healthcare costs, double what any other developed county spends.
There are many reasons for our excessive healthcare spending. For example:

As illustrated in the above chart, many medical procedures are far more expensive here than in other countries.
Profit levels in the healthcare industry are often very high, for example: 16.4% for pharmaceuticals, health-care information 9.4%, home healthcare firms 8.5%, medical labs 8.2% and generic drug makers 6.5%.
Health insurers, on the contrary, have a very low profit margin, (2.2% in 2009), and so can hardly be blamed for the high cost of healthcare.

The Affordable Care Act greatly expands access to healthcare but does very little to control costs. The Manhattan Institute’s Avik Roy has outlined a plan, “Transcending Obamacare: A Patient Centered Plan for Near-Universal Coverage and Permanent Solvency” which would reform Obamacare by making it more like two very successful and low cost consumer-driven plans, those in Switzerland and Singapore.
These two countries feature government sponsored health savings accounts, backed up by insurance for catastrophic care. What happens is that out-of-pocket spending for healthcare per individual is higher in Switzerland and Singapore than it is in the U.S., as indicated in the chart below.
In other words, the real reason for our high cost of healthcare is that Americans don’t have enough “skin in the game.” We have very little incentive to hold down the cost of our own care because it is mostly paid for by third party insurance companies.
As the cost of healthcare continues to climb, such changes are already beginning to creep into the health insurance market place. Private companies are raising the deductibles on the insurance plans which they subsidize. The bronze, silver, gold and platinum plans on the ACA exchanges differ largely by the level of the insurance deductible.
Avik Roy’s plan referred to above in essence speeds up the process of converting the ACA into an efficient, consumer-driven healthcare system by making it more flexible and therefore more adaptable to market forces.

Why the U.S. Needs True Health Care Reform

Posted on December 2, 2014 by jackheidel

The Affordable Care Act has improved access to healthcare by already enrolling over 7 million Americans who were previously uninsured. It is estimated that there will be a total of 20 million new enrollees by the end of this decade.
But as the above chart from a recent Gallup survey indicates, the cost of healthcare is now a big barrier for an increasing number of people with health insurance.
The University of Chicago economist, Casey Mulligan, discusses the cost issue in a recent Wall Street Journal article “The Myth of ObamaCare’s Affordability” as well as in a new book. He makes the following points:

Although the ACA helps specific populations by giving them a bigger piece of the economic pie, the law diminishes the pie itself by reducing the amount that American’s work and making their work less productive.
35 million men and women currently work for employers who don’t offer health insurance. These tend to be small and midsize businesses with lower paid employees. The result of penalizing businesses for hiring and expanding will be less hiring and expanding.
The “29er” phenomenon is a good example of how the law harms productivity. If a business has 50 or more employees who work over 30 hours a week, it is required to offer health insurance. Many employers have thus adopted 29-hour work schedules which lessens overall productivity.
Mr. Mulligan estimates that the ACA’s long-term impact will include about 3% less weekly employment, 2% less GDP and 2% less labor income. He also claims that these effects will be visible and obvious in just a few years by 2017!
The ACA is thus weakening the economy. For the large number of people who continue to pay for their own healthcare, healthcare is now less affordable.

Conclusion: we need true healthcare reform which addresses cost as well as access and this can be achieved by fixing Obamacare. It is not necessary to repeal it. The Manhattan Institute’s Avik Roy has developed a plan to do this: ”Transcending Obamacare.” Mr. Roy’s Plan would keep the exchanges, end both the individual and employer mandates, and migrate both the Medicare and Medicaid programs onto the exchanges over time. These features will greatly reduce the cost of American healthcare. Check it out and see for yourself!

How to Shrink the Deficit: Control Entitlement Spending by Fixing Obamacare

Posted on November 13, 2014 by jackheidel

Our country faces two major fiscal and economic problems:

How to boost the economy in order to put more people back to work.
How to either increase tax revenue or better control spending in order to shrink the deficit.

My last post, “The Great Wage Slowdown and How to Fix It” makes a specific tax reform proposal to cut tax rates for all by shrinking tax deductions for the wealthy. This would put tax savings in the hands of millions of wage earners with stagnant incomes, who would likely spend it, thereby boosting the economy.
As the above chart clearly shows, there is only one realistic way to shrink the deficit. We have to do a better job of controlling entitlement spending (Social Security, Medicare and Medicaid.) As a practical matter, this means we have to cut back the cost of American healthcare in general, both public and private.
The Manhattan Institute’s Avik Roy has come up with an attractive Plan for doing just this, “Transcending Obamacare.” Mr. Roy’s proposal is to:

Repeal the individual mandate. Insurers are encouraged to design policies of high quality tailored to individual need. By lowering the cost of insurance for younger and healthier individuals, the Plan will expand coverage without a mandate.
Repeal the employer mandate, thereby offering employers a wider range of options for subsidizing employees insurance.
Keep the exchanges to provide broad access as well as subsidies for those with low incomes.
Migrate the Medicaid population onto the exchanges.
Raise the Medicare eligibility age by 4 months per year indefinitely. Over time this will maintain future retirees on exchange-based or employer sponsored health plans.

By gradually moving the Medicaid and Medicare recipients onto the exchanges, both of these very large populations will receive equal quality coverage to everyone else, delivered in a cost effective manner. Mr. Roy estimates that the Plan will expand coverage by 12 million above Obamacare levels by 2025 and reduce the deficit by $8 trillion over 30 years.
This is the sort of major healthcare reform which we need to get entitlement spending under control!

How Do We Establish A Free Market Healthcare System in the U.S.?

Posted on October 16, 2014 by jackheidel

As I discussed in my last post, it is critical and urgent for the U.S. to sharply reduce the cost of healthcare, both public and private. There are basically two different ways to do this: with either a “single payer” system like most of the rest of the developed world has, or with a more nearly free market system than we have at the present time.
Both Switzerland and Singapore have largely free market systems with universal coverage and they operate at far less public cost, as shown above, than for other developed countries including the U.S. The Singapore model features Catastrophic Care insurance, coupled with Health Savings Accounts, for all citizens, with subsidies for those with low-income. The Swiss model employs exchanges, similar to our own Affordable Care Act, to subsidize, on a sliding scale, health insurance for the low income. In Switzerland only 20% of the people receive an insurance subsidy compared to 85% in the U.S.
The Manhattan Institute’s Avik Roy has proposed a true free market system for the U.S., “Transcending Obamacare: a patient-centered plan for near-universal coverage and permanent fiscal solvency,” which is modeled on the Swiss system. Mr. Roy’s plan sets up universal exchanges to offer insurance, subsidized if necessary, to everyone who does not receive it from their employer.
He proposes that over time Medicare and Medicaid recipients as well as Veterans would migrate into the exchange system. This means that eventually the 30% of Americans (elderly, poor and veterans) who now receive direct government (single payer) support would become part of the exchange system. Mr. Roy’s Universal Exchange Plan is projected to reduce deficit spending by $8 trillion over the 30 year period which it will take to fully phase in the exchanges. This will go a long way towards solving our serious fiscal problems.
Conclusion: both Singapore and Switzerland have high quality, cost efficient free market health care systems which proves that a free market approach is possible. Mr. Roy adapts and expands the Swiss model for the much larger and more complex American market. It isn’t necessarily the last word in healthcare reform but it takes a big step in the right direction.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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