Tag Archives: cutting spending

Why Medicare Is Such an Enormous and Urgent Fiscal Problem

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An article in today’s (April 4, 2013) New York Times, “Misperceptions of Benefits Make Trimming Harder”, explains why Medicare is such an enormous and urgent fiscal problem for the federal budget.  The article points out that an average single male who retired in 2010 will receive more than $100,000 in Medicare benefits in excess of what he pays into Medicare in taxes before retirement and premiums while receiving benefits.  The gap is projected to grow for future retirees.  Too many people are not aware of this huge discrepancy between what they pay into Medicare compared to the benefits which they will draw out after retirement.
According to the reporter, Democratic leaders, including the President, are aware of this funding gap but are unwilling to discuss it publicly.  Instead they take the easy way out by criticizing Republicans who do want to address the problem in a responsible manner.
The problem is so serious that trims around the edges, such as means testing and/or higher premiums for affluent retirees, will not accomplish anything more than making a small dent in the funding gap.  Raising taxes will not get the job done either because they would have to go up too much and too often as the problem keeps getting worse and worse.
The only way to really solve the problem is to control the costs of Medicare (and more generally for all of health care).  There are two basic ways to do this.  One way is to have a government run single payer system with very strict rationing.  The other way is to make everyone, including seniors, financially responsible for their own health care, with subsidies for people with low incomes.
The challenge for Republicans is to frame this basic choice as clearly and vividly as possible.  The American people must come to realize that the status quo in health care cannot continue.  If this message can be delivered effectively to the broad public, I am confident that a majority of people will want a free market system with choice rather than severe government rationing.

We Should Take David Stockman Seriously

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In the March 31, 2013 edition of the New York Times David Stockman has an opinion piece entitled “Sundown in America” in which he says that “eight decades of borrowing, spending and money-printing by the government have bankrupted America” and that “these policies have brought America to an end-stage metastasis.  The way out would be so radical that it can’t happen.”
Although he exaggerates and overhypes with vivid language, I believe that he is basically correct about the gravity of our current predicament.  We should take him seriously because many of his proposed solutions are on the right track even if they are unnecessarily extreme.
For example, he berates the House Republicans for giving Social Security and Medicare a ten year pass instead of wanting to reform them right away.  Of course it would be better to reduce benefits to affluent seniors immediately but it will take bipartisan cooperation to accomplish this, and the Democrats are dragging their feet on entitlement reform.
Mr. Stockman’s strongest language is directed at the finance industry.  He wants to rein in the big Wall Street banks by cutting off their access to cheap Federal Reserve loans and deposit insurance.  The Glass-Steagall Act would be reinstated.  The central mission of the Federal Reserve should be restored: “to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy.”
Is our situation as hopeless as Mr. Stockman says?  Interestingly, he provides evidence that we may have turned the corner in the right direction.  His chart “Indebtedness Dwarfs the Economy” shows that total debt owed by government, companies or individuals, as a percentage of GDP, started dropping about three years ago.  What we need to do is make sure that we keep this total debt measure moving steadily downward for the indefinite future.

The Spending Crunch

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In the March 26, 2013 edition of the Wall Street Journal, the nonpartisan columnist Gerald Seib makes a very astute observation, namely that “Liberals Face Spending Dilemma”.  The Republicans are beating the drums for a balanced budget, the economy is growing at the anemic rate of 2% per year and entitlement spending is growing much more rapidly than this.  So what is going to happen?  Discretionary spending is going to have to shrink!   This means a big hit for both defense and nondefense discretionary spending, meaning most of the traditional programs funded by the federal government.
How do we get out of this predicament?  The best way would be to make the economy grow faster but this is unlikely to happen while the Democrats control the executive branch and are unwilling to implement pro-growth policies such as tax reform, deregulation and stepped-up international trade.
But even with more business friendly pro-growth policies, entitlement spending is growing way too fast and eating up a larger and larger piece of tax revenues.  The Republicans want to control the costs of Social Security, Medicare and Medicaid but simply cannot get this done without Democratic cooperation and support.  Either Democrats help figure out how to make significant cost cutting changes to entitlements or else steep cuts in discretionary social spending will have to be made.
The Republican drive to rapidly shrink deficit spending down to zero is for real and will not be denied.  The sooner the big spending liberals figure this out and adjust their behavior, the better off will be the whole country.

Budgeting 101: Don’t Forget Hauser’s Law!

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In 1993 the investment analyst W Kurt Hauser pointed out that “No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP.”  Hauser’s Law of course is really just an empirical observation which is referred to as a “law” because it has been so amazingly consistent since 1945.  Some economists use Hauser’s Law to argue that there is no sense in raising tax rates because higher rates won’t really raise additional revenue over time.  To the extent which Hauser’s Law is accurate, the only way to significantly increase tax revenue is to grow the economy faster.

However Hauser’s Law is also quite relevant in figuring out how much money the federal government should be spending in a given year.  If revenues are limited to 19.5% on average over time, then overall spending should also be approximately limited to 19.5%, or else there will be a negative balance, i.e. a deficit.  If there is a large imbalance year after year, as during the past few years, then the national debt will grow rapidly and become the huge problem that it is today.

In this respect, take a look at John Taylor’s March 17, 2013 entry in his blog Economics One entitled “An Opportunity to Contrast and Compare Budgets”.  The Republican House Budget rapidly (over two or three years) brings federal spending down below 20% of GDP and then levels it off at about 19.5% after that.  On the other hand, the Democratic Senate Budget brings spending down to about 21.5% in 2017 and then it creeps back up to 22% by 2023.  This is why the House achieves a balanced budget in ten years while the Senate budget doesn’t even come close to achieving balance.

Can there be any question as to which of these two budgets is the more fiscally responsible?  To me it is obvious but if you feel otherwise please do say so in the comment section which follows this entry.

Comparing the House and Senate Budgets

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The Republican House of Representatives and the Democratic Senate have each in the past few days issued 10 year budget proposals.  The Heritage Foundation has neatly and dramatically summarized the huge differences between these two budgets and the visions they convey for the future of our country in the coming years.

By limiting the growth of spending to 3.4% per year for the next ten years, the Republican budget shows that it will be possible to shrink the deficit down to zero by 2023 and restore the sound fiscal policies which have guided our country for most of its history.  On the contrary, the Democratic budget projects 5% increases in spending for the next ten years and ends the next decade with annual deficits in the neighborhood of $600 billion.

In other words, a little bit of fiscal restraint, i.e. holding year-to-year spending increases to 3.4%, is all that it will take to get the U.S. back on a sound fiscal track.  What is so difficult about achieving such a common sense approach to budgeting?  If the Obama administration, or perhaps the Senate majority, wants to start new programs on early childhood education or green energy research, for example, then all it has to do is reduce spending elsewhere in the federal budget now approaching $4 trillion annually.

Fundamentally, in the final analysis, adopting a reasonable budget and sticking to it, is a moral issue.  Living within one’s means is such basic and transparently obvious good sense that the advocates of such a policy will ultimately prevail.  For the time being at least, the Democrats are ceding the high ground to the Republicans.

Is There a Need for Urgency in Fixing Medicare?

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In the February 27, 2013 edition of the New York Times the economics analyst Eduardo Porter writes that “Medicare Needs Fixing but not Right Now”. He shows that cost increases have slowed down recently and that there are huge disparities between Medicare reimbursement rates as well as hospital utilization rates by Medicare enrollees in different parts of the country.  Therefore we should first focus on operating Medicare more efficiently before making big changes in its finances.

But a recent study by Michael Chernew, Richard Frank and Stephen Parente, “Slowing Medicare Spending Growth: Reaching for Common Ground”, points out that historically Medicare costs have been growing much faster than GDP.  And now, with demographic pressure from retiring baby boomers, the only way to stabilize Medicare costs as a percentage of GDP, will be to hold per-beneficiary cost increases below the overall rate of GDP increase.

Chernew, Frank and Parente also point out that there are many similarities between the Republican voucher plan for cost control and the Democratic proposal to move away from the fee for service model to either a fixed payment per episode model or global payment per beneficiary model.  A voucher plan shifts responsibility for cost control to beneficiaries and their insurers while the global payment model shifts this responsibility to providers.

Conclusion: yes, it is an urgent matter to slow the growth in Medicare costs and also, yes, there is lots of common ground between the two parties in getting this done.  So let’s insist that our national leaders take Medicare reform seriously and accept no excuses for further delay!

The Stark Budget Choices Now Before Congress

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The Congressional Budget Office has just released a new report, “Macroeconomic Effects of Alternative Budgetary Paths” concerning several decisions which Congress will have to make in the very near future, pertaining to the sequester budget cuts of $1.1 trillion over ten years, approving a budget for the remainder of the current 2013 fiscal year and raising the federal debt limit.

The first page of the CBO report conveys the basic message with a single graph.  If the sequester is cancelled and there is perhaps even additional deficit spending in the near term, it will give the economy a small boost in 2014 but cause a drop in GDP of close to 1% by the year 2023.

If the deficit is decreased by an additional $2 trillion over 10 years, beyond the spending cuts required by the sequester, the economy will take a small hit in 2014 but will receive a boost of close to 1% by 2023.  An additional deficit reduction of $2 trillion over 10 years, will cause a greater immediate hit to the economy but produce a much more substantial boost of almost 2% by 2023.

An excellent summary of the CBO report, including political implications, is given by the Wall Street Journal on February 6, 2013.  For example, it is the last scenario above, an additional $4 trillion deficit reduction over ten years, which would put the US on a path to achieve a balance budget by 2023.

Under current law, with no additional deficit reduction in the future beyond the sequester which takes effect on March 1, the annual deficit will shrink for the next three years but then resume a steady climb back to $1 trillion by 2023 and the publicly held national debt will climb from its current level of 73% of GDP to 77% of GDP by 2023.

The choice now before Congress is thus very clear:  should we continue kicking the fiscal can down the road, as the Keynesian economists want to do, or should we bite the bullet, take a small immediate hit to the economy, and thereby put the future of our country on a sound financial basis?

To me the answer is clear as clear can be.  But it will require our national leaders to stand up and be counted.  Do enough of them have the political courage to do what needs to be done?

Why $16 Trillion Only Hints at the True U.S. Debt

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In an Op Ed article last fall in the Wall Street Journal two former Congressmen, Chris Cox and Bill Archer, point out that the total US government debt, now over $16 trillion, is only a fraction of the total unfunded liabilities of the government, which now exceed $87 trillion.  The unfunded liabilities represent future expected payments for Social Security, Medicare benefits for currently employed workers as well as current retirees and also the future retirement benefits of current federal employees and retirees.

If this enormous sum of already obligated future payouts is not bad enough, even scarier is the rate of growth of these unfunded liabilities.  In calendar year 2011, the accrued expense was $7 trillion, double the entire current revenue of the federal government of about $3.5 trillion.  In other words this awful problem is getting much worse every year.

The House Republican majority is trying to address our almost incomprehensibly bad debt problem.  Will they be able to generate enough public support to force the Senate and the President to take the problem seriously?  Right now the odds do not look very good for effective action to be taken.  An enormous crisis is almost on our doorsteps.  How bad will it have to get before public opinion demands action?  It is very hard to remain optimistic about the future of our country when we appear to lack the collective will to take the action which is so obviously needed

The Myth of Government Default

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The moment of truth is rapidly approaching and House Republicans need to crank up their resolve to force a real long term solution to the debt crisis of our federal government.  As David Rivkin and Lee Casey describe in the January 11, 2013 issue of the Wall Street Journal, the threat of government default is greatly exaggerated.  $200 billion in tax revenue is coming into the federal government every month, more than enough to keep making interest payments on the national debt as well as paying many other bills.

Far too many national leaders are in a state of denial about the seriousness of our fiscal problems.  House Speaker John Boehner says that “The American people do not support raising the debt ceiling without reducing government spending at the same time.”  The “Boehner Rule” stipulates that an increase in the debt limit must be paired with spending cuts of equal size over a ten year period.  This is an excellent framework for kicking off a national discussion to persuade the American people to support cutting back spending on entitlements and social programs as well as defense spending.

Every economic unit whether it be an individual, a family, a business, a community or a larger political subdivision, has to learn to live within its means.  This elementary rule of common sense applies to our whole country just as much as to any other social group.  Republicans have the clearest grasp of this basic truth at the present time and now need to exhibit the courage of their political convictions.  The future of our country depends on it!

The Magnitude of the Mess We’re In

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In an opinion piece last fall in the Wall Street Journal, George Schultz, and several colleagues from Stanford University’s Hoover Institution, very cogently describe the horrendous economic and fiscal mess in which the United States is now embedded.  Trillion dollar deficits for four years in a row, now going on five, a persistently weak recovery from the great recession of 2008, several rounds of quantitative easing by the Federal Reserve now totaling over three trillion dollars, and worst of all, a complete lack of consensus by political leaders on how to respond to this dangerous situation.

The President and the Democratic majority in the Senate, flush with victory after the November 2012 elections, believe that they have a mandate to continue their present expansionist policies.  The Republican majority in the House of Representatives, only slightly diminished by the 2012 elections, feels equally strongly that it has a mandate to continue applying the brakes.  As a fiscal conservative I agree with the Republicans that we must return to the sound fiscal and monetary policies advocated so eloquently in the above WSJ article.

What strategy can the House Republican’s follow to move federal policy in this direction?  House Speaker John Boehner has suggested that any increase in the debt limit be matched dollar for dollar by cuts in federal spending over a ten year period.  For example, the “Boehner Rule” would require that an increase in the debt limit of $1 trillion, enough to last about one year, would be offset by spending cuts of $100 billion a year for 10 years.  If such a regimen were then repeated a year from now, another $100 billion in spending cuts per year would be needed as well, and so on.

Taking into account the baseline budgeting process in Congress, whereby budgets are automatically increased from one year to the next by the anticipated rate of inflation, and also the occasional need for emergency appropriations to cover natural disasters and other dire events, the Boehner Rule would have the likely effect of holding spending approximately constant from one year to the next in absolute terms.  While this is not the same as what most people would understand by actual spending cuts, nevertheless it does represent significant restraint in federal spending, compared to recent patterns.

As the economy continues on its current growth trajectory of about 2% per year, this would mean that new tax revenues would eventually catch up with relatively flat spending levels and eventually lead to a balanced budget.