Tag Archives: Medicaid

Are Deficit Fears Overblown?

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In yesterday’s Wall Street Journal columnist David Wessel responds too mildly in “Why It’s Wrong to Dismiss the Deficit” to Larry Summers’ view that we should not worry about the deficit.  Mr. Summers says, “Let me be clear.  I am not saying that fiscal discipline and economic growth are twin priorities.  I am saying that our priority must be on increasing demand.”  According to Mr. Wessel, here is the essence of Mr. Summers’ argument:

  • The deficit isn’t an immediate problem; growth is.
  • We’ve done enough (about the deficit) already.
  • The future is so uncertain that acting now is unwise.

Granted that the deficit for fiscal year 2013 is “only” $680 billion after four years in a row of deficits over a trillion dollars each and that interest rates are at an historically low level at the present time.  The problem is that the public debt is now at the very high level of 73% of GDP and is projected by the Congressional Budget Office to continue climbing indefinitely.  Interest on the debt was $415 billion for fiscal year 2013 which represents 2.5% of GDP of $16.8 trillion.  With GDP growth increasing at about 2% per year since the end of the recession in June 2009, this means that interest on the debt is already slowing down the economy and it’s just going to keep getting worse as interest rates inevitably return to higher historical levels.
Growth is very definitely an immediate problem.  But increased government spending is the wrong way to address it.  The right way to address it is with broad based tax reform (lowering tax rates in return for closing loopholes) to stimulate investment and risk taking by businesses and entrepreneurs.  Significant relaxing of the regulatory burden would also help, especially for the small businesses which are responsible for much of the growth of new jobs.  So would immigration reform to boost the number of legal workers.
As uncertain as the future is, we can be quite sure that entitlement spending (Social Security, Medicare and Medicaid) will be going up fast in the very near future as more and more baby boomers retire and the ratio of workers to retirees continues to decline.  It would be very risky indeed to assume that economic growth will increase fast enough to pay for increased entitlement spending.
Conclusion:  large deficits are a very urgent and immediate problem which we ignore at our peril!   Furthermore the best ways of boosting the economy don’t require increased government spending.

Is Expanding The Social Safety Net Compatible With Fiscal Restraint?

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Yesterday’s New York Times addresses this issue with an article “Ohio Governor Defies G.O.P. With Defense of Social Safety Net”.  It describes how Republican Governor John Kasich has maneuvered to expand Medicaid coverage in Ohio to 275,000 low income Ohioans under the new healthcare law, over the objections of his own Republican dominated state legislature.
Mr. Kasich is a former congressional deficit hawk and there is little doubt about his fiscal conservatism.  He recently balanced his state budget by cutting revenues to local government by $720 million.  But he has also expanded state aid for the mentally ill and supported efforts to raise local taxes for improving education.  He says “for those who live in the shadows of life, for those who are the least among us, I will not accept the fact that the most vulnerable in our state should be ignored.”
Especially after the disastrous debt ceiling debate, with Tea Party Republicans willing to default on our national debt in order to defund Obama Care, it is critical for fiscal conservatives to publicly demonstrate that they are not opposed to helping the poor in a reasonable manner, as long as it is cost effective.
To be in favor of controlling entitlement spending is not the same thing as wanting to abolish entitlement programs.  In fact, it is just the opposite.  We must control their costs so that the government will have the means to continue to support them.  It is just plain ordinary common sense.  If our national debt continues to grow unchecked, we risk not only entitlement programs but our entire way of life.
Take Medicaid as a concrete example.  Right now the federal government pays a percentage of the costs incurred by state governments in running the program.  The more a state spends for Medicaid, the greater the reimbursement from the federal government. This increases spending for both the states and the federal government.  A more cost effective approach is to give each state a block grant from the federal government and enough leeway to operate its own program as efficiently as it can.  Exactly this approach is being used in Rhode Island and is working very well at a much lower overall cost.
Being a fiscal conservative is not the same thing as being mean spirited!  The future of our country depends on getting this crucial message out far and wide!

A Pessimistic View of America’s Future III. What, Me Worry?

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This week’s cover story in Barron’s, by Gene Epstein, “What, Me Worry?”, attempts to create more attention for our impending fiscal crisis.  “Stop all the dithering, D.C.  The baby-boom budget bomb could destroy the economy within 25 years.  The time to act is now.”  As Mr. Epstein says:

  • Obamacare is part of the problem but so are Medicaid, Medicare and Social Security.
  • The latest budget report from the Congressional Budget Office, published on September 17, makes an “optimistic” forecast that the federal debt will grow to 100% of GDP by 2038 from an already high 73% today.
  • But its more realistic forecast is a debt of 190% of GDP by 2038, worse than the current debt of Greece, which has a 27% unemployment rate.

“By 2038 there will be 79.1 million U.S. residents 65 and older, up from 44.7 million today.  The working age population, 18 to 64, will grow at a much slower rate, to 214.7 million from 197.8 million today.  As a result the dependency ratio will plummet to 2.7 working age people to support each senior in 2038, from 4.4 today.”
“Since the elderly population won’t begin to reach critical mass until the mid-2020’s, the rising tide of red ink will be relatively modest over the next ten years.”
“The nation thus might be likened to a family with about 10 good working years left which needs to cut spending in order to save for a rapidly approaching old age.  But alas, it’s a dysfunctional family incapable of rational planning.”
Today we have the option of simply containing the growth of entitlement spending.  If we don’t act now, tomorrow we will be forced to make deep cuts in entitlement spending.  Today we have the option of making intelligent cuts in discretionary spending.  Tomorrow we’ll be forced to make drastic cuts across the board which will make the slowdown in the economy due to the budget sequester “look like a Sunday afternoon walk in the park” (Bill Clinton, May 2013).
What does it take to knock common sense into our national leaders?

Our Dire Fiscal Situation I. The Facts

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Take a look at the front page of a new report from the Congressional Budget Office, “The 2013 Long-Term Budget Outlook”.  It shows very clearly the huge fiscal mess confronting our country in the near future.
First of all, our national debt has almost doubled as a percentage of GDP in the last five years, from about 38% of GDP at the end of 2008 to 73% today.  Although the debt is actually projected to dip to 68% of GDP in 2018, it then begins a steady climb because of increasing interest costs as well as increasing spending on Social Security and government healthcare programs (Medicare, Medicaid and the Affordable Care Act).  The debt will be back to 71% of GDP by 2023 and then climb rapidly to about 100% of GDP by 2038.
Notice from the graph that federal tax revenues have just about recovered from the recession and will soon level off at their historical level of about 19.5% of GDP.  But federal spending will resume a steady climb, reaching 26% of GDP by 2038.  As the gap between revenue and spending gets wider and wider, the national debt grows faster and faster.  This is the enormous fiscal problem we are faced with in the next 25 years.   The worse it gets the harder it becomes to turn around.  It is imperative to address this problem without delay.
In order to reduce the debt from its current level of 73% of GDP down to the historical average of 38% by 2023, Congress would have to pass an additional $4 trillion in spending cuts or tax increases over the next decade.  The only way such enormous savings can be achieved is by reining in entitlement spending: Social Security, Medicare, Medicaid and ACA.  I will outline one way to do this in my next post!

Private Health Care Reform is Getting Started!

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Yesterday’s Wall Street Journal has a very interesting article, “More Employers Overhaul Health Benefits”, which describes a movement just getting started whereby employers give their employees a fixed sum of money and let them choose their own plan from an online market place.  The idea is that employers will be better able to predict and control their healthcare expenses for employees.  Furthermore, employees will be able to get better value for dollars spent by selecting their own coverage options, deductible amounts, copays, etc.
In fact, in an exchange run by Liazon Corp., which has 60,000 people enrolled, 75% of workers have chosen less expensive plans than they had before, by accepting bigger deductibles and copays, as well as smaller choices of healthcare providers and restrictions such as primary-care gatekeepers.
This is such an appealing approach to private healthcare cost control that the Accenture Management Consulting Company estimates just five years from now there will be 40,000,000 business employees receiving their healthcare benefits in this manner.  This would be a phenomenal development!
The United States spends 18% of GDP on healthcare altogether, both public and private, which is double the amount spent by any other country.  This enormous expense is a major reason why wage growth is stagnant in our country as well as why the costs of public programs like Medicare and Medicaid are so high and contributing to so much government debt.  It is critical for our country to get the rapid increase of healthcare costs under much better control.  That’s why this new movement of employers and employees working together on this critical problem is such a big step in the right direction.
If the estimate by Accenture is anywhere nearly accurate about how fast this new private healthcare selection method will grow, then there will soon be an excellent opportunity for Congress to expand its benefits to the control of Medicare and Medicaid costs as well.  This is very exciting indeed!

Federal Cutbacks Suggest State and Local Expansion

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A front page article in yesterday’s Wall Street Journal, “An Ohio Prescription for the GOP:  Lower Taxes, More Aid for Poor”, describes how Ohio’s Republican Governor, John Kasich, a former congressional spending hawk, has expanded Medicaid coverage in Ohio and steered millions more dollars into local food banks.  Mr. Kasich says, “When you die and go to heaven, St Peter is probably not going to ask you much about what you did about keeping government small.  But he is going to ask you what you did for the poor.”
There are good reasons why we should shift programs and responsibilities from the federal government back to states and localities.  At the federal level there is little fiscal restraint and therefore little incentive for making sure that governmental programs operate efficiently and effectively.  Study after study by the Government Accounting Office, as well as by private think tanks, demonstrate enormous waste and duplication in virtually all areas of federal government.  This long lasting fiscal irresponsibility at the federal level has now led to a massive national debt which will have a perverse effect on our nation’s prosperity for many years to come.
At the same time, all state and local governments are required to balance their budgets.  This means that they have to pay attention to the costs of all programs and set spending priorities.  They have to make sure that all functions of government are effective and be prepared to cut back or eliminate any program which is performing poorly.  States such as Illinois and California, and cities such as Detroit, Chicago and Philadelphia, which have huge operating deficits year after year, will eventually be forced to declare bankruptcy (such as Detroit has just done) in order to reorganize their finances and make a fresh start.
It has long been a practical axiom that government should be as close as possible to the people.  But now it is a fiscal necessity as well to shift as much as possible from federal control back to state and local control.

Going On a Short Vacation!

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I began this blog last November, right after the national elections, to promote my strong view that the United States is on a dangerous fiscal course, with an already enormous, and still rapidly growing, national debt.  After four years in a row of deficit spending exceeding $1 trillion per year, the current year’s deficit is projected to be “only” $640 billion.  Far too many people, including many of our national leaders, interpret this to mean that the problem is getting solved and so we can relax.  But the already accumulated $12 trillion in public debt will cost our economy $600 billion a year, a significant fraction of total revenue, in interest alone when interest rates return to their historical average of 5%.
This is just the tip of the iceberg.  Federal spending is out of control all across the board.  Entitlement spending on Medicare and Medicaid is growing at twice the rate of inflation and is an especially acute problem.  But progress here depends on figuring out how to get healthcare costs in general under control, a huge challenge.  The much reviled sequester is working but it’s not nearly enough by itself to get discretionary spending under control.
Four years after the end of the Great Recession the economy is still limping along at 2% GDP growth and 7.6% unemployment.  And this is after enormous fiscal stimulus (deficit spending) as well as quantitative easing by the Federal Reserve.  Current policies are not working.  What we need is broad based tax reform with lower marginal rates (offset by ending tax preferences) to stimulate business investment and the private risk taking which propels the economy and creates jobs.  And, of course, faster economic growth will also increase tax revenue and therefore lower the deficit, as well as boosting employment.
This is a brief summary of what I’ve been saying for the past eight months.  To me it just seems like simple common sense, but not everyone agrees!  At any rate I’ll be out of town for the next two weeks.  I hope to be able to make a few new posts while I’m gone.  Stay tuned!

Free Market Healthcare in America: How Do We Get There?

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Almost everyone agrees that healthcare in the U.S. is way too expensive but how do we change to a better system?  Douglas Holtz-Eakin and Avik Roy have laid out a roadmap to do this: “The future of free-market healthcare”.  Here is the essence of their plan: 1) start with what we will soon have under Obamacare: subsidized health-insurance exchanges; 2) limit subsidies in the exchanges to incomes up to 300% of the federal poverty level as in Massachusetts and also limit the growth of subsidies to the overall growth rate of the economy; 3) use the exchanges for Medicare reform by raising the eligibility age for Medicare by 3 months each year.  Retirees would then gradually migrate into the defined contribution system of the exchanges; 4) gradually shift Medicaid enrollees into the exchanges.  The exchanges would allow them to move up the income ladder while maintaining their health insurance.
Eventually all low income and retired  Americans would become part of a unified health-insurance system based on the exchanges which would provide subsidies as needed.  I would add one additional feature to this system:  remove the tax exemption from employer provided insurance.  This would, of course, create healthcare cost consciousness amongst employees.  Employers could still offer a health insurance package to their employees but it would become part of their taxable compensation.  They might decide to join an exchange instead for a better deal.
Such a system as outlined above is based on the Swiss free market model.  The Swiss choose their own doctors and have short waiting times for appointments.  The cost of healthcare in Switzerland is about half as much per person as in the U.S. so we would achieve a huge savings.  We have got to make big changes in the way we deliver and pay for healthcare in the U.S. and here is one way to do it!

Is Emphasis on Deficit Reduction Impeding Recovery?

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The New York Times reported on May 9, 2013 that “Emphasis on Deficit Reduction
Is Seen by Economists as Impeding Recovery”.  According to the reporter, “Tax increases and especially spending cuts, the critics say, take money from an economy that still needs stimulus now, and is getting it only through the expansionary
monetary policy of the Federal Reserve.  … In all of this time, the president has fought unsuccessfully to combine deficit reduction, including spending cuts and tax increases, with spending increases and targeted tax cuts for job-creation initiatives in areas like
infrastructure, manufacturing, research and education.”
The $845 billion deficit for the current year, as estimated by the Congressional Budget Office, hardly represents austerity, and is in fact a massive stimulus.  The president says that he wants “sensible” deficit reduction, but simply offsetting sequester
spending cuts and higher taxes on the wealthy with other spending increases and
targeted tax cuts as above, really amounts to no deficit reduction at all.
Most observers agree that it is entitlement spending, especially for Medicare and Medicaid, which is the main driver of the national debt.  Serious deficit reduction will not be achieved by further whittling away at discretionary spending, as wasteful as
some of it is.  The president has proposed changing the way the Consumer Price Index is computed, by switching to a “chained CPI” which will save the federal government about $30 billion per year.  This is a worthwhile change to make but represents a relatively modest savings by itself.
If the Democrats want to spend more money on “investments” and other forms of
fiscal stimulus, to try to speed up the recovery, they will have to get on board with serious reform of health entitlements.  The rapidly exploding national debt is a far too serious and urgent problem to ignore any longer.  The president might say that it should be addressed in a sensible manner, but postponement is no longer a sensible option.

Why is American Health Care So Expensive?

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In the May 5, 2013, New York Times columnist Ross Douthat “What Health Insurance Doesn’t Do”, discusses a recent Oregon Medicaid experiment which shows that the Medicaid program improves health outcomes only slightly even though it does help people avoid huge medical bills.  As Mr. Douthat goes on to explain, the Oregon result offers a valuable suggestion for how to make American health care overall much more efficient and less costly.
The problem is that our health insurance system does not function like any other type of insurance.  All other types of insurance such as for house or car protect only against actual disasters like a house burning down and not routine maintenance repairs which affect all of us on a regular basis.  In other words, health insurance could and should be restricted to very expensive treatments such as for cancer, for example.  Routine health problems, which affect everyone over a lifetime, even including end of life care, can and should be paid for with mechanisms such as health savings accounts, which can be rolled over from one year to the next.
A more elaborate discussion of the inefficiency of American health insurance, and how to fix it, is provided by David Goldhill in the NYT on February 17, 2013 “The Health Benefits that Cut Your Pay”, and also in his new book on health care referenced therein.
Clearly the cost of health care is a huge fiscal and economic issue for our country.  Health care entitlements, such as Medicare and Medicaid, are the main drivers of the national debt.  The rapidly growing cost of Medicaid is also a huge problem at the state level because it is crowding out support for other essential major programs such as education and infrastructure improvements.  The cost of private health care paid by employers holds back wage gains and is a major factor in the growing income inequality in American society.
It is time for Americans to demand action on health care costs from our national political leaders.  It is a problem which affects almost all of us and therefore should be amenable to a bipartisan solution in Congress.  We need to get this message out much more strongly!