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!

Straight Talk about the National Debt

Posted on October 26, 2014 by jackheidel

The deficit for fiscal year 2014-2015 just ended is “only” $483 billion, about 2.7% of current GDP, and some observers are saying this means that our deficit and debt problems are now under control and we should stop fretting so much about them.
There is a nonpartisan outfit in Washington DC, “Fix the Debt,” which focuses on this very problem and they’re saying not so fast. In their document, “Common Myths about the Debt,” they debunk several false impressions about the national debt:

Myth: Deficit levels are falling and therefore debt is no longer a concern.
Fact: Over the next decade our debt is on track to grow about $8 trillion (see above chart). Its growth will accelerate after 2018 and will exceed the size of the entire economy by 2035.
Myth: Deficit reduction is just code for austerity which will ultimately hurt the economy.
Fact: A comprehensive and gradual deficit reduction plan can replace austerity with targeted and pro-growth reforms which promote economic recovery and accelerate long-term wage growth.
Myth: Deficit reduction will harm low-income and vulnerable populations.
Fact: Every recent bipartisan deficit reduction plan has included progressive reforms that ask more from those who can afford it and protect low-income programs.
Myth: The debt can be solved with faster economic growth.
Fact: Economic growth must be part of the solution, but it can’t solve the debt problem alone. Productivity growth would have to be 50% higher over the next quarter century just to hold debt to its current record-high levels.
Myth: Taxing the wealthy more will solve the debt problem.
Fact: Our debt problems are too large, and the top 1% too few, to solve the entire problem by raising taxes on the wealthy.

Conclusion: Our debt problem is so large that it can only be solved by stern measures, such as tax reform, including reducing tax breaks, and also spending reform to slow the growth of entitlement programs. Stay tuned for further discussion of this critical problem!

Why I Support Jim Jenkins for the U.S. Senate from Nebraska

Posted on September 14, 2014 by jackheidel

I have been writing this blog for almost two years because of my great concern about the direction our country is headed on fundamental fiscal and economic issues. Federal spending has been out of control for over thirty years and the situation is getting progressively worse. Our national debt is over $17 trillion and growing at a rate of $500 billion per year. And it will soon be growing much faster than this if we don’t make big changes. Economic growth has been stuck at the anemic rate of 2.2% of GDP ever since the end of the Great Recession over five years ago.
Our national leaders are simply not doing the job they were elected for. Democrats blame the Republicans and Republicans blame the Democrats but excuses are not good enough. We need people in Washington who can figure out how to navigate within the system and actually find solutions to our very serious problems.
I believe that Jim Jenkins, a registered independent from Callaway, is the best qualified candidate to do what needs to be done. Check out his website, Jenkins for Senate, and decide for yourself. Here are a few of his views on important issues:

Fixing the Debt. Jim supports the recommendations of the Simpson-Bowles Commission which calls for dramatically cutting federal spending especially for entitlements and also raising taxes if necessary in order to drastically shrink our annual deficits.
Tax Reform. Jim supports lower tax rates achieved by eliminating many of the tax expenditures (credits, deductions and exclusions) embedded in the code. This is what is needed to boost economic growth.
Affordable Care Act. Jim believes that the ACA has many rough edges but that it is possible to fix them rather than repealing it and starting over.
Immigration Reform. Jim supports comprehensive immigration reform which includes securing our borders but at the same time expanding the number of guest worker visas to meet the needs of business and agriculture.
Veterans Administration. Jim supports setting up a plan to enable veterans to obtain medical care from health professionals within their own communities.

Compare these common sense views with the far more ideological positions of the other candidates in this race. I think that you will agree with me that Jim Jenkins is the person we want representing us in Washington!

The Big Picture on Debt Part IV The Full Model

Posted on August 14, 2014 by jackheidel

For the past week I have been discussing different aspects of our alarming debt problem as vividly illustrated in a recent report from the Congressional Budget Office (see chart below). My last post discusses what I call the Buffett Model: G > D, meaning that as long as nominal growth G (real growth plus inflation) is greater than the deficit D, then the accumulated debt will decrease as a percentage of GDP and the debt is said to be “stabilized”. This, of course, is what has happened in the U.S. historically after all of our major wars and especially after WWII (see below). The problem is that our current situation in 2014 appears much bleaker going forward because the debt is projected (by CBO) to just keep on growing indefinitely.
Today I look at a broader model, the so-called BRITS model: R + I > (S – T) + B where

B = borrowing costs
R = real growth
I = inflation
T = taxes
S = spending.

The BRITS model reduces to the Buffett model by letting G = R + I and D = (S – T) + B. The value of this more general model is to show the relationship between all five of these important variables. To meet the objective of stabilizing debt, according to this intuitive model, we should increase both R and I and decrease S – T and B.
The Federal Reserve is involved by keeping B as low as possible and making sure that I is large enough (but not too large or other problems will occur). Congress can help by cutting spending or raising taxes but, of course, both of these actions are hard to do politically.
If real growth R is high enough then the desired inequality will hold and debt will be stabilized. But how is this accomplished? The Fed has been trying to increase growth through quantitative easing but it’s not working very well. Many economists think that it would be more helpful for Congress to implement broad based tax reform, whereby tax rates are lowered and loopholes and deductions are closed in a revenue neutral manner so that overall tax revenue remains the same. But nobody wants to lose their own deductions so this is hard to do.
As much as faster growth will help, it is still critical for Congress to get spending under control. The above chart from the Heritage Foundation shows that under current trends by 2030 federal spending will have increased so much that all federal tax revenue will be spent on just entitlements and interest payments alone! Since this is unrealistic, some sort of a major new crisis is likely to occur before 2030!
Conclusion: The BRITS model helps to understand the complexity of our debt problem and some of the steps that need to be taken to alleviate it. I will return to it in the future.

The Big Picture on Debt

Posted on August 7, 2014 by jackheidel

Most observers agree that the Congressional Budget Office is a reliable source for detailed, objective and nonpartisan information about the federal budget. Its frequent reports are cited by all sides in budget debates. Today I refer to the recent CBO publication, “The 2014 Long-Term Budget Outlook in 26 Slides.” In particular, one of its graphs entitled “Federal Debt Held by the Public” (pictured here) has a striking message.
Throughout history, the U.S. has had relatively large debt following each of its major wars, especially after World War II. But the debt has always declined relatively quickly, as a percentage of GDP, as the economy recovered and grew briskly. But now, in 2014, we are stuck with a huge debt which is projected (by CBO) to not shrink but rather to keep getting much worse. And furthermore, the so-called “Extended Baseline Projection” in the graph, is an optimistic projection which disregards several long-term trends such as mortality decline, possibly slower productivity growth, higher interest payments and likely growth of federal healthcare spending.
How in the world will this huge debt problem be resolved in a favorable manner? Republicans don’t want to raise taxes and Democrats don’t want to cut spending, especially on entitlements. The only action taken in the last few years, under threat of not lifting the federal debt limit, was to implement a Sequester on discretionary spending. This helps but not nearly enough.
Recent budget agreements are not auspicious for future progress. A five year farm bill was passed last spring without significant cuts to either farm subsidies or food stamps. Highway spending was extended for a few months with a gimmick when what we really need to do is increase the federal gasoline tax. A $17 billion (over three years) increase for veteran’s health has just been approved when what we really need is an extensive overhaul of the Veterans Administration.
There are deficit hawks in Congress, on both sides of the aisle, but their numbers are too small to be effective. It is just very hard to vote no on spending measures when the pressure coming from special interest groups on all sides is to vote yes.
I am an eternal optimist by nature but I have a hard time visualizing a favorable outcome to our fiscal dilemma. I am arranging my own affairs accordingly.

How to Control Federal Spending III. Reform Medicaid!

Posted on July 15, 2014 by jackheidel

One of the many controversies involving the Affordable Care Act concerns the expansion of Medicaid to cover low income people up to 138% of the federal poverty level. As Robert Samuelson reported in the Washington Post a few days ago, “The Real Medicaid Problem,” 24 states have refused to expand Medicaid coverage even though the federal government will pay 100% of all additional costs until 2017.
As Mr. Samuelson points out, the underlying issue is a matter of cost:

The basic Medicaid program is funded with a fixed percentage of each state’s costs paid by the federal government. This means that the more a state spends, the more is contributed by the federal government. From 1989 to 2013, the share of state budgets devoted to Medicaid has risen from 9% to 19%. This upward trend is clearly unsustainable.
In Medicaid, children and adults up to age 65 represent three-fourths of beneficiaries, but only one-third of costs. The quarter of beneficiaries who are aged or disabled are responsible for two-thirds of costs.
More than 60% of nursing home residents are on Medicaid.
There is no assurance that the federal share of the expanded coverage will continue at the announced rate of 90% after 2017 because the federal government is in much worse financial shape than are most states.

An interesting Op Ed appeared recently in the Wall Street Journal, “The Smarter Way to Provide Health Care for the Poor,” written by Mike Pence, the Governor of Indiana. In 2008 Indiana set up the Healthy Indiana Plan to better serve low income Indianans. It now provides Health-Savings Accounts to 40,000 low income citizens, with very good results. Indiana is applying for a waiver to the ACA to use Medicaid expansion funds to provide HIP to all low income families up to 138% of the poverty level ($33,000 for a family of four).
Clearly, individual states, when offered the opportunity, are quite capable of coming up with innovative solutions for difficult problems.
A good way to resolve the problem of state resistance to Medicaid expansion is to fundamentally change Medicaid into a block grant program whereby the federal government contributes a specific amount of money to each state each year. Then the states design their own programs to meet their own needs. Block grant funding for Medicaid is a common sense approach to address one aspect of our huge fiscal problem in an intelligent way!

The Government We Deserve II. How Do We Make It Better?

Posted on May 18, 2014 by jackheidel

“When the Athenians finally wanted not to give to society but for society to give to them, when the freedom they wished for most was freedom from responsibility, then Athens ceased to be free.”
Edward Gibbon, 1737 – 1794, The Decline and Fall of the Roman Empire

In my last blog, “The Government We Deserve,” I reported on a new book “Dead Men Ruling” by Eugene Steuerle, which shows how “Dead and retired policymakers have put America on a budget path in which spending will grow faster than any conceivable growth in revenues.”
Our country is clearly in a huge predicament. We can get out of this jam by:

Restoring Balance: our legislators should only appropriate spending for one year at a time.
Investing in our future: i) opportunity is a more optimistic goal than adequacy ii) policies to assure adequacy often reduce opportunity by creating negative incentives (e.g. food stamps, disability programs, housing vouchers) iii) means-tested programs are often anti-family (i.e. discourage marriage)
Building a Better Government: our main goal today should be to restore fiscal freedom by allowing future generations to create the government they need and want. i) constrain the automatic growth in big federal tax subsidy, health and retirement programs ii) reorient government towards investment, children, opportunity and leanness

“Both parties talk the talk about deficit reduction but fail to see that the deficit is but a symptom of a much broader disease – the extent to which both have tried to legislate far too much of what future government should look like.”
Here are the kinds of fixes which are needed:

Eschew Constitutional Fixes (i.e. a balanced budget amendment, term limits).
Require Presidents to propose budgets which balance over a business cycle.
A True Grand Compromise (end automatic growth of entitlements, generate revenues needed to pay current bills).

As Mr. Steuerle says, “If the obstacles to progress are considerable, the payoffs are enormous.”

The Government We Deserve

Posted on May 15, 2014 by jackheidel

“As for the future, your task is not to foresee it, but to enable it.”
Antoine de Saint-Exupery, 1900 – 1944

An important new book, “Dead Men Ruling,” by the Urban Institute’s C. Eugene Steuerle, has just been published. Here is the flavor of its message:
“Dead and retired policymakers have put America on a budget path in which spending will grow faster than any conceivable growth in revenues. … The same policy makers also cut taxes so much below spending that they created huge deficits, which have now compounded the problem with additional debt.”
“Both sides have largely achieved their central policy goals – liberals have expanded social welfare programs, conservatives have delivered lower taxes. Both now cling tenaciously to their victories.”
In short, “our central problem is the loss of fiscal freedom.” There are “four deadly economic consequences of this disease:

rising and unsustainable levels of debt,
shrinking ability of policymakers to fight recession or address other emergencies,
a budget that invests ever less in our future and is now a blueprint for a declining nation, and
a broken government, as reflected in antiquated tax and social welfare systems.”

In addition there are “three deadly political consequences:

a decline of ‘fiscal democracy’ depriving current and future voters of the right to control their own budget,
a classic ‘prisoner’s dilemma’ where both left and right leaning elected officials conclude that they will suffer politically if they lead efforts to impose either spending cuts or tax hikes, and
rising hurdles to changing our fiscal course because, to do anything new, requires reneging on past promises of rising benefits and low taxes, that voters have come to expect.”

In other words the U.S. is in a very difficult predicament. Mr. Steuerle thinks it will take a major “fiscal turning point” to escape from the present danger. Both sides will have to make big concessions in order for us to get out of this jam. But how is this possibly ever going to happen? More next time!

The Long Run and the Short Run

Posted on March 23, 2014 by jackheidel

“I agree with you that something must be done now. The trick is what will work the best in the short term to trigger the agreement between the fiscal conservatives and the modern liberals to cut costs and balance the budget that we both agree on. We can agree to disagree on the solution details but I hope you are successful in achieving the short term goals you are working tirelessly on.
Just as big a question is what will work the best in the long run to prevent it from happening again. I will continue to work on changing the intellectual environment that I see as a precondition to solidifying your short-term gains and preventing a re-occurrence.”
These are the words of my Omaha libertarian friend, David Demarest, with whom I have an ongoing dialogue. He wants to cut back and limit the scope of government. I’m willing to have a more expansive government as long as we’re willing to pay for it.
The secret to solving many of our current problems (stagnant economy, high unemployment, massive debt, increasing inequality) is to grow our economy faster. The best way to accomplish this is by boosting investment and entrepreneurship with broad-based tax reform, by lowering tax rates for both individuals and corporations, paid for by eliminating deductions and closing loopholes.
But some people think that lowering tax rates means lower taxes on the rich. To counteract this perception, and at the same time to raise additional tax revenue to lower the deficit, I propose to levy a new wealth tax of 1% of assets with an exemption of $10 million per person to make sure that the tax only applies to the “truly wealthy.”
I believe that a program along these lines is the best way to get our economy back on track. But, at the same time we need to figure out how to avoid falling back into another slow growth, high debt trap anytime soon.
A good way to achieve long run protection is with a balanced budget amendment. It would need to be flexible, allowing for emergencies, and also phased in over several years to allow citizens and legislators time to make the necessary adjustments to spending and taxes.

Considering a Wealth Tax for the U.S.

Posted on March 18, 2014 by jackheidel

What should a country do when it has

Massive accumulated debt and annual deficits predicted to grow indefinitely.
A rapidly growing population of retirees heavily dependent on expensive entitlement programs such as Social Security and Medicare.
A national Congress which is unwilling to make significant spending cuts for fear of offending powerful constituent groups.
Growing income inequality and wealth inequality.
A stagnant economy and high unemployment which makes inequality worse.
An inefficient income tax system which does not take in enough tax revenue to pay the bills.

The best response by far is to implement broad-based, pro-growth, tax reform. I have often discussed how to make major changes to our current income tax system. I have also described an attractive way to introduce a consumption tax, the so-called Graetz Plan.
Another way to reform taxes is to introduce a wealth tax. The economist Ronald McKinnon has described a way to do this in a Wall Street Journal column, “The Conservative Case for a Wealth Tax”. His plan is to implement a federal wealth tax in addition to the federal income tax. It would consist of a flat tax of about 3% imposed on household wealth in excess of a $3 million exemption which would exclude 95% of the population. In addition to bringing in a significant amount of new revenue each year, which is its principal objective, it would serve the purpose of making a flatter, pro-growth, income-tax system more palatable to people who are concerned about inequality, and therefore to a much wider audience.
The economics journalist, Daniel Altman, recently reported in the New York Times, “To Reduce Inequality, Tax Wealth, not Income” that American household wealth totaled more than $58 trillion in 2010. The most recent issue of Forbes Magazine reports that there are now 492 billionaires in the U.S. with a total wealth of $2.3 trillion. A 2% tax on the wealth of just these billionaires alone would raise $46 billion. A 0.5% tax on the wealth of all Americans would raise $290 billion annually. These examples show that a “moderate” wealth tax could bring in a significant amount of new tax revenue which would make a big dent in shrinking our annual deficit.
We have to do something and do it quickly. The problem will occur when interest rates return to their normal level as they surely will before long. When this happens, interest payments on our national debt will sky rocket. It’s going to be painful regardless, but let’s try to head for the softest landing we can manage!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Tag Archives: cutting spending