America’s Most Serious Problem: Excessive and Growing Debt


I know that I repeat myself a lot. I am a fiscal conservative and social moderate.  This puts me in the middle of the political spectrum from left to right.  I support social welfare programs if they are legitimately helping the less fortunate among us.  I am especially supportive of programs for African-Americans because of the racial bias they experience.

Unfortunately our national leaders have collectively lost a sense of fiscal responsibility in recent years.  Looking at the standard debt chart (above) produced by the Congressional Budget Office, it is clear that indifference to debt commenced under President Reagan and has waxed and waned ever since.  The debt has been growing especially fast ever since the Great Recession in 2008 and now stands at 77% of GDP, the highest since the end of WWII.  Shrinking the debt (as a percentage of GDP) is now America’s most urgent problem.

As I have discussed before, it is the entitlement programs of Social Security, Medicare and Medicaid, as well as interest payments on our increasing debt which will continue to worsen the debt problem in the coming years  without strong corrective action.
All entitlement programs need to be reformed to impose cost control. Right now the two healthcare bills in Congress propose that the funding mechanism for Medicaid be changed so that it will be on a fixed (federal) budget from now on, rather than be continued in its current open-ended form.
Medicare is an even more expensive program than Medicaid.  It would be better to fix both of these programs at the same time, but it is better to fix Medicaid alone than to do nothing at all.
It would be even better to replace our employer provided healthcare system with a uniform, but limited, health insurance tax credit for all (including for the self-employed) and to make all of these major changes at the same time.  This would be the fairest way to proceed.

Conclusion. The current GOP plan to curtail healthcare costs could be much improved.  It is only a small step in the right direction.

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Fiscal Policy after the Election


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 or destroy 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.

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Our Dire Fiscal Situation: A Summary


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.
Capture20The 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).
Capture21The 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?

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The High Cost of U.S. Health Care


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.
CaptureThe 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.
Capture6The 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.
Capture10The 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!

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Health Care Spending is Driving Budget Deficits


In my last post, “Annual Deficits are Starting to go Back Up,” I refer to a new report from the Congressional Budget Office to show that it is the large annual increases in federal healthcare spending (Medicare, Medicaid, CHIP and Obamacare) which is the main driver of our annual deficit spending which is going to start increasing again unless we do something serious about it.
CaptureThe basic problem is, as shown by the above chart, that Americans, in general, don’t have enough skin in the healthcare game, i.e. we don’t pay enough of our health care expenses out of our own pockets, and therefore we don’t directly feel the pain of high and rapidly increasing health care costs.
A group of policy experts from the American Enterprise Institute have come up with a practical plan to address this problem.  Its elements are:

  • Retain employer provided coverage. This is how half of Americans get health insurance. The only change would be an upper limit on the tax preference for employer-paid premiums so that only the most expensive plans would exceed it.
  • Tax Credits. Individuals without employer coverage would get a tax credit with no strings attached to pick any state-approved plan that meets their needs.
  • Continuous coverage protection. As long as people stay insured, they cannot be denied enrollment based on health status.
  • Medicaid reform. The federal government would give states fixed, per-person payments based on historical spending patterns. Able bodied adult and their children could combine Medicaid and the (refundable) federal tax credit to enroll in a private insurance option.
  • Medicare reform. Medicare would provide a fixed level of assistance which seniors would use to purchase a health plan of their own choosing.
  • Expanded Health Savings Accounts. These are intended to be used with catastrophic insurance with a high deductible. HSAs could be established with a one-time $1000 tax credit and unused funds rolled over from one year to the next.

Such a system does not repeal, but rather improves the Affordable Care Act. It keeps the ACA exchanges and introduces cost controls in a flexible manner, i.e. without mandates.  It is the type of system the U.S. needs to get health care costs, and therefore overall deficit spending, under control.

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Lowering the Cost of American Healthcare III. Single Payer?


My last two posts, here and here, argue that the high costs of American healthcare, almost double what other developed countries pay per-capita, has two fundamental causes which must be addressed:

  • Very low out-of-pocket costs as a result of the tax exclusion for employer provided care.
  • The very expensive, and rapidly growing, government entitlement programs of Medicare and Medicaid.

It is often suggested that the best way to get these high costs under control is for the U.S. to adopt a single-payer, government run, healthcare system, like many other developed nations have done. Writing in yesterday’s Wall Street Journal, the policy analyst, Nathan Nascimento, makes a persuasive, and well referenced, counter argument to this suggestion:

  • The State of Vermont recently backed away from implementing a single payer system because of the very high tax increase which would have been required, more than doubling Vermont’s annual budget.
  • The State of Colorado will vote a year from now on a petition-supported single payer proposal, ColoradoCare, which would be paid for by a $26 billion annual state tax increase and is therefore unlikely to pass.
  • In Canada, which has a single payer system, the average wait between a general practitioner’s referral and delivery of treatment was more than four months in 2013.
  • Our own Veterans Affairs hospital system, a single payer system on an annual budget, is failing thousands of veterans who often die while waiting for treatment.
  • Medicare, an open ended single payer entitlement system, now costing almost $600 billion per year, is one of the main causes of our burgeoning, out of control, national debt.

Conclusion: For the U.S. to move to a national single payer system would be very risky and very costly. It is far better to wait and see if Colorado or some other state is willing to take such a leap of faith and then see how it works out in that context.

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Lowering the Cost of American Healthcare II. Entitlements


My last post emphsizes that any solution to our nation’s long term debt problem must include reining in the cost of American healthcare.  There are two major drivers to this problem as is made clear by a new report from the American Enterprise Institute, “Improving Health and Health Care: An Agenda for Reform.”
Capture1First of all, out-of-pocket consumer spending on healthcare has been steadily declining for many years. The less we pay directly for our own healthcare, the less incentive we have to control costs.
Capture2Secondly, the cost of healthcare entitlement spending, for Medicare and Medicaid , is growing rapidly as a percentage of GDP.  Such a rapid increase is unsustainable and must be curtailed. Here is what the AEI report recommends for doing this.

  • Medicaid. It serves two groups of people: 1) able bodied adults and their children and 2) the disabled and elderly. The federal government should make fixed, per-capita payments to the states based on historical spending patterns for these two groups. The able-bodied adults and children would get the same (refundable) federal tax credits as everyone else supplemented by Medicaid payments. The states would be totally responsible for the second group.
  • Medicare. The current system would be gradually migrated to a premium support system which would provide enough to pay for a choice of competing insurance options. The eligibility age would gradually rise to 67, consistent with Social Security.
  • Health Savings Accounts. HSAs are tax-preferred vehicles for saving for medical expenses until the (perhaps high) deductible amount is reached. Their use is growing rapidly. A one-time $1000 federal tax credit for establishing an HSA would increase their number even more. Their use should be expanded into Medicaid and Medicare as well.

Such reforms as these can significantly lower the cost of providing healthcare to the poor, the elderly and everyone else as well. If we don’t do something along these lines, we will eventually end up with a government run single payer system much to our detriment.


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