This graphic from the good folks at Hamilton Place Strategies adds some perspective on the billions and trillions at play:
It’s intriguingly simple: Limit future increases in Medicare and Medicaid healthcare spending to cut debt. That’s the easy-to-understand core of House Budget Committee Chairman Paul Ryan’s budget plan, The Path to Prosperity. But the idea risks a voter backlash if medical inflation doesn’t slow, too. Otherwise, quality and service will suffer, badly fraying the social safety net. Republican Ryan thinks injecting some needed market discipline rather than sticking with President Barack Obama’s bureaucratic tinkering will do the trick. And he’s right.
Federal government healthcare expenditure for those two programs could more than double over the next four decades to nearly 14 percent of GDP, according to the Congressional Budget Office. The CBO says the new plan devised by House Budget Committee Chairman Paul Ryan would keep spending at around 5 percent of output.
Or to put it another way, without the Ryan plan, Medicare and Medicaid are a $58 trillion (net present value through 2085) unfunded liability. These two programs are the main reason the CBO sees America’s debt-to-GDP ratio hitting 344 percent (assuming the economy doesn’t collapse first) in 2050 vs. 62 percent in 2010. But with the Ryan plan, the entire federal debt is just 10 percent of GDP in 2050 before disappearing later that decade. Problem solved.
There’s no fiscal miracle here. Ryan accomplishes this feat through simple math. He would increase revamped subsidies to seniors and the poor at rates far below the predicted pace of healthcare inflation. That has led the CBO to raise an eyebrow, wondering if such effective reductions would be politically sustainable. Oldsters would, for instance, eventually bear a far larger share of personal healthcare costs than under the current Medicare program.
But what the CBO misses is that Ryan bets he can square the circle by slowing medical inflation through increased competition. Instead of Medicare providing insurance, retirees would pick their own government-certified private plan, helped by a fixed subsidy from Washington. Fancier coverage would cost more. And in exchange for some protection from big bills, seniors would pay a greater share of small ones. Both features might encourage bargain hunting among competing plans. Republicans also want to lessen the role of middlemen in medical billing. Economists think heavy intermediation makes people less aware of the costs and therefore allows healthcare prices to rise faster than they should.
Competition generally works in the other five-sixths of the U.S. economy. And it should also in healthcare if government loosens its grip. Prices for laser eye surgery, a procedure commonly paid directly out of pocket, have fallen sharply over the past two decades. Then there’s the Swiss example. There citizens choose, aided by subsidies, among competing private insurers who must provide a basic benefits package. Ryan’s Medicare reform proposals bear more than a passing resemblance to that system. Costs have risen more slowly in Switzerland than the United States. The Swiss also devote just 11 percent of their economy to healthcare, counting both government and private spending. While that’s a lot compared to the UK and Scandinavia, it’s thriftier than America’s 17 percent and rising.
The only real differences between Ryan’s new plan and the one he co-authored with Clinton administration economist Alice Rivlin, is that it’s a bit stingier on increasing the subsidies and it doesn’t have a public option. That, along with the Swiss feel to it, is evidence that what Ryan has proposed is a rather centrist plan that Democrats should flock to if they want to preserve economic security for all Americans.
Philip Klein, now at the Washington Examiner, scores a great scoop today with a peek at how the House Progressive Caucus plans on responding to the Ryan Path. The liberal blueprint claims to balance the budget by 2021, mainly through a laundry list of tax increases that would raise government revenue as a share of GDP to a record high of 22.3 percent — four points higher than the historical average. (This also assume the tax increases have zero impact on growth.)
But the fiscal problem is not merely making the numbers balance out over ten years, but also over the rest of the century. That will require spending less on entitlements and more economic growth. But this plan does give insight into the sort of budget Washington liberals would prefer. Here is Phil:
Overall, taxes would rise to 22.3 percent of the economy, compared with 18.3 percent under the Ryan proposal.
The plan would also build on Obama’s most notable initiatives. It includes an additional $1.45 trillion in economic stimulus spending. On health care, the plan would add a government-run plan, or “public option,” to Obamacare and have the government negotiate drug prices.
Yet while other parts of government would grow, the defense budget would be gutted. The proposal would “reduce baseline defense spending by reducing strategic capabilities, conventional forces, procurement, and R&D programs.”
If liberal activists and Democratic lawmakers rallied around this plan, or something similar, then there could be an honest debate contrasting Ryan’s vision of lower taxes and entitlement reform with liberal plans to raise taxes, slash the military and further expand the role of government.
It’s not just the labor market that worries Team Obama:
“We are making progress on jobs and need to make more progress on jobs,” said David Axelrod, a former senior White House aide who is part of Obama’s 2012 campaign team. “But people are also grappling with stagnant wages and rising prices. That’s a legitimate, important concern for people and we have to pay close attention to it.”
So basically, here is where we are. Policymakers have spent the last three years tossing not millions, not billions, but trillions of borrowed dollars at the output gap in the American economy. And what is the result? A fair measurement of unemployment comes in higher than anything we’ve seen since the Great Depression. Real wages are in decline. Food stamp enrollment is at an all time high. Jobs are coming back, but at a painfully slow rate and without very good pay. Growth for this year and next are expected to come in below the historical trend. We’ve created a huge budget deficit, as we’ve borrowed from future generations to cover the output gap from the last couple years. And let’s not forget this one (not that we ever could!
So, for those analysts in the press who think that Obama will win in 2012 if incomes are still being propped up by massive (deficit financed) government spending, real salaries are declining or flat, unemployment is far above the historical trend, good paying jobs are scarce, the deficit is at an all time high, and the president has no real idea about what to do (except, of course, high speed rail), I have only this to say: you might want to think twice before you place that wager. This president is not yet out of the woods on the economy. Not even close.
The piece has some great charts, but I particularly like this one which shows any income bounce is all sugar and steroids: