Bad news from the Budget Wars

April 24, 2011

Bad News from the Budget Wars
The first round of the budget wars was fun, didn’t you think?
The rhetoric was especially amusing with plenty of melodrama from both
sides. If the politicians were correct, we’re doomed. Republicans said we
were doomed if we didn’t cut at least $100 billion from the last few
months of the 2011 federal budget. Democrats said we were doomed if we
cut more than $19 billion.
In the end, both sides compromised on a $38.5 billion cut, considerably
less than the GOP’s Official Level of Doom and considerably more than
the Democrat’s. (Actually, once you subtract money that wasn’t going
to be spent anyway and factor in cuts that don’t begin until next year
or later, the actual impact on the 2011 budget is less than $500
million out of a $1.65 trillion deficit.)
The next chapter will be the debate over raising the debt ceiling to more
than $14 trillion. It’s incomprehensible. It doesn’t even look real when
you write it down – $14,000,000,000,000.
The hardcore budget-cutters, who care little about consequences and
greatly about bottom lines, vow to vote against it. We all understand,
and many sympathize, with the sentiment. Unfortunately, failure to
increase the ceiling has some really dire consequences, like defaulting on
our current loans, damaging our credit rating and, subsequently, devaluing
the dollar.
If Congress manages to resolve the debt ceiling issue with minimal
bloodshed we’ll finally move on the main event, the 2012 budget.
The facts, which will likely be ignored by both extremes, are stark. Fully
63% of the budget is now consumed by Social Security, Medicare, Medicaid
and defense spending, the Big Four of the federal budget. There are
additional hundreds of billions spent on defense and security that are off
the books. Even worse, the percentage of spending on Social Security and
Medicare will continue to rise dramatically as additional millions of Baby
Boomers become eligible to use both.
Even if we eliminated all spending other than the Big Four we still would
not balance the budget.
Nevertheless, the battle lines have already been drawn.
The starting point for Republicans will be Rep. Paul Ryan’s recently
released proposal reducing spending by $6 trillion over the next 10
years. The starting point for Democrats will be President Obama’s proposal
that reducing spending by $4 trillion over the next 12 years.
Neither plan balances the budget, eliminates annual deficits, reduces the
debt or addresses Social Security. Ryan’s plan actually increases defense
spending and provides huge tax breaks for corporations and the rich.
The keystone to the Ryan plan is the complete deconstruction of Medicare.
Medicare began in 1965 as an amendment to Social Security legislation.
The idea was to provide healthcare for Americans 65 and older at a time
when senior Americans were being ravaged by poverty.
Medicare has been plenty popular among those who receive it, less so among
the medical community paid by it, and is abhorred by newly elected
Republicans who see it as unsustainable and a ripe target for cutting.
A typical Medicare recipient has about 75-80% of their healthcare costs
covered. The remainder must be covered with supplemental insurance or
paid for out-of-pocket.
The Ryan plan would more than reverse that ratio. He would have
individuals 65 and older pay for 84% of their healthcare needs through
private insurance and Medicare would cover the remaining 16%. His theory
is that private insurers, excited about the possibility of tens of
millions of new customers, and in a perfect example of the free market at
work, will fall all over themselves to sign up these new policy holders.
And at competitive rates, too.
But health insurance isn’t a typical supply-and-demand commodity. To be
viable there must be a very large number of policy holders who rarely, if
ever, have a health issue other than an annual check-up. They subsidize
those with chronic or catastrophic health issues.
The tens of millions of seniors Ryan proposes to unleash on the health
insurers will nearly all be heavy consumers of healthcare services or
products, or soon will be. The pool of those doing the subsidizing will
remain the same size. Premiums would necessarily skyrocket unless there
is some sort of significant government subsidy to either consumers or
providers. It won’t work.
President Obama and far too many Democrats, on the other hand, think this
can be solved to a large degree by taxing the rich, closing tax loopholes
and eliminating some tax breaks.
What we call loopholes and tax breaks cost the treasury more than $1
trillion a year. We almost all agree that those which allow huge
corporations to escape without paying any taxes at all need to be
reformed. As should the laws that allow the likes of General Electric to
create corporate shells “headquartered” in tax sheltering places like the
Cayman Islands and avoid U.S. taxes altogether.
Which other loopholes should we close? Those that allow us to deduct
mortgage interest or college tuition or business expenses or out-of-pocket
medical expenses or the taxes we paid last year or any of the others we
all use every year?
We absolutely must reform Medicare and Medicaid. Our tax system is long
overdue for a serious overhaul. Paul Ryan’s plan, which strips away
benefits from those least likely to be able to find coverage elsewhere, is
certainly not the answer. Nor is Barack Obama’s Robin Hood proposal.
Somewhere in the middle is an answer. Not the mindless slash-and-burn
approach of the new Republicans or the every-social-program-is-sacred
philosophy of the old Democrats but something in the middle.
Republicans and Democrats are going to have to work together. And they’ll
have to do it with a presidential election looming in 2012.
Given their previous track records and the likelihood of them suddenly
behaving like grown-ups, maybe both sides were right when they debated the
2011 budget reductions; we are doomed.