President Trump’s budget for 2018 presents a plan to achieve a balanced federal budget in ten years, by 2027. This is a highly desirable goal but there is much skepticism about whether or not his budget is realistic, see here and here.
My thoughts on this important matter are:
Fiscal restraint is a common sense necessity, and is not austerity. Our public debt (on which we pay interest) now stands at 77% of GDP, the highest since WWII, and will continue to increase without major changes in public policy. Right now the debt is almost “free” money because interest rates are so low. As interest rates inevitably go up in the near future, interest payments on the debt will skyrocket and become a huge drain on our federal budget and make annual deficits even worse than they already are.
3% annual GDP growth, as assumed in the Trump budget, is almost certainly too optimistic. However the Trump Administration is on track to achieve significant deregulation and averaging 2.5% growth over the next ten years is doable.
Insufficient entitlement reform is a big drawback for the budget. It will be very difficult, essentially impossible, to achieve and sustain a balanced budget without modifying Social Security and Medicare to make them self-financing. Turning Medicaid into a block grant program to the states would finally put Medicaid on a sensible budget.
Requiring able-bodied welfare recipients to work is a good idea and is the basis for cutbacks in social welfare programs.
The Departments of State, Interior, Education and Justice should be able to absorb cutbacks and operate more efficiently.
Conclusion. There are many good initiatives built into the Trump budget. Unfortunately there are also some invalid assumptions and glaring omissions. It does not represent a bona fide plan to balance the budget in ten years but at least it recognizes the importance of doing so.
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.
President-elect Donald Trump is on record as favoring tax and regulatory reform in order to speed up economic growth and I have made it clear that this can be accomplished without increasing our debt.
But what is really needed is to grow our economy faster and actually shrink our debt at the same time. It will be very difficult, essentially impossible, to accomplish this with growth alone or even by raising taxes because the magnitude of our debt, 76% of GDP and rising, is so great.
There is really only one way to begin to shrink the debt and this is to get entitlement spending under control. The above chart shows that, without major changes, by 2032 all tax revenue will go towards healthcare, Social Security and net interest. Here is what needs to be done:
Social Security is already paying out $100 billion per year more than it collects in payroll taxes. Its Trust Fund will run dry in 15 years unless major changes are made and all benefits will drop by about 25% when this happens. We need to either increase the eligibility age for full benefits and/or raise the income cap on payroll taxes. These changes can be phased in but the sooner we get started the less painful it will be.
Medicare is an even bigger problem than Social Security. Either we have government rationing, i.e. “death panels,” or else rationing by price meaning some form of premium support. This simply means that we will all have more “skin in the game,” in the sense that we will all have a financial incentive to minimize our own healthcare expenses.
Medicaid should be block granted to the states so that the federal government is not obligated to a fixed match for all state Medicaid expenses. Again, cost control is the object of such a change.
Conclusion. It needs to be emphasized as strongly as possible that the reason for stringent cost control of entitlement programs is to preserve them for posterity, not destroy them. Our prosperous way of life is severely threatened by our unwillingness to recognize this problem.
I want to emphasize that I voted for Hillary Clinton on Tuesday because Donald Trump has such a sleazy and mercurial personality. But Mr. Trump was clearly the change candidate and we need change big time. His strongest base of support is the white working class which has not really recovered from the Great Recession of 2008-2009 and he will surely try to help out these people.
Here are the changes we need in order of importance:
Grow the economy faster. Tax reform, individual and corporate, and regulatory reform are what are most needed. Mr. Trump and the House Republicans are in rough agreement on both of these major initiatives and hopefully the new Republican led Senate will go along. The best kind of tax reform means to lower tax rates and shrink deductions enough to avoid losing tax revenue. This can be accomplished if a real effort is made to do it this way.
Begin to shrink our massive debt. This can only be done by major entitlement reform, meaning to control the costs of Social Security, Medicare and Medicaid. Medicare should be transitioned over from a single payer system to a premium support system, consistent with a reformed Affordable Care Act. Healthcare costs can only be contained by giving consumers more skin in the game, meaning higher deductibles supplemented with health savings accounts.
More assertive foreign policy. Worldwide peace and stability depend on our own economic and military strength. Right now China, Russia and Iran think they can push us around. President Trump will not let this happen.
Trade and immigration policy. Most knowledgeable people agree that international trade is generally beneficial. We simply have to do a better job of retraining American workers who lose their jobs to foreign competition. The key to immigration reform is tougher border security plus an effective guest worker visa program.
Conclusion. The Republican House of Representatives has an excellent plan, “A Better Way,” for American economic, fiscal and social renewal and Mr. Trump is largely supportive of it. This augers well for fundamental progress in the next four years.
I’ve been saying for several months that I would endorse one of the two main presidential candidates before the election and that “Donald Trump Should Withdraw from the Presidential Race” because of his personal sleaziness and that, in any case, I could not vote for him.
But it is worse than this. As the Wall Street Journal stated recently, “Mr. Trump would start out with more than half of the country disliking him, and most of his advisors lack governmental experience. Too many blunders or an early recession (especially one caused by trade restrictions) could cause voters to sweep out the GOP Congress in 2018, setting up a return to an all-progressive government in 2020.” In other words the disaster of 2009-2010, when President Obama had a filibuster-proof Congress, could easily happen all over again.
Mrs. Clinton has said that she wants, ”higher taxes, more spending on entitlements, more subsidies and price controls in ObamaCare, more regulations on business, more limits on political speech, and more enforcement of liberal cultural values on schools and churches.” The likely result of such an agenda would be more lost years of slow economic growth. And “the costs of slow growth are corrosive. Flat incomes lead to more social tension and political enmity. The fight to divide a smaller pie would get uglier in a country that once was accustomed to rising possibilities.” This is a highly conceivable result of four years of a Clinton presidency. Conclusion. I am not exactly enthusiastic about Mrs. Clinton. But she is predictable and much less risky than Mr. Trump. As long as the House of Representatives remains under Republican control, which is very likely, Mrs. Clinton will have to negotiate with it to implement much of her agenda. This could conceivably lead to bipartisan progress on such major issues as tax reform and entitlement cost control.
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 ordestroy 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.
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. The 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). The 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?