Tag Archives: Medicaid

Cutting Non-Defense Discretionary Spending Just Isn’t Enough

Cutting discretionary spending alone is not going to solve our fiscal woes. Entitlement reform must happen if we’re to maintain our economic strength.

That, or raise taxes. A lot.

Adding up the Federal Balance Sheet

Click to see larger image.

Do you know your net worth? If you add up all your assets (cash, property, etc) and subtract all your liabilities (debts), do you know what you are worth?

As a person, your net worth on paper doesn’t really account for your intangibles, like personality, education, or dashing good looks. Just your value if you sold everything you own.

Now how about the United States?  What is the net worth of our “of the people, by the people, for the people” government? If we were to add up all the assets and liabilities, what would our country be worth (or owe, as the case may be)?

The question matters. Though we hear a lot of talk about deficits, earmarks, and budget cutting, there is a world of difference between what politicians usually deal with–discretionary spending–and what is the biggest debts on the US balance sheet–the entitlements.

Let’s look at the stuff we hear a lot about: cutting  the discretionary spending in the federal budget. In reality, this is one of the smaller items on the federal balance sheet, but it’s the one that gets the most play in the news.  For example, look at this visualization by William Gross:

Look at “Non-Defense Discretionary” on line three of this (extremely) simplified  federal budget. In 2011, non-Defense Discretionary items will make up just a quarter of the budget. Over the last 40 years, it makes up on average only 23%. I doesn’t change that much. In other words, when we hear about politicians cutting discretionary items, they’re just chopping at the leaves, but leaving the trunk relatively unscathed.

That trunk is the other 75% of the budget. It’s stuff that Congress doesn’t mess with, can’t mess with, or, and here’s the kicker, is afraid to mess with. We’re talking entitlements, defense, and interest payments on the debt the United States owes to creditors. This means Medicaid, Medicare, Social Security, the Departments of Defense and Homeland Security, and, of course, interest payments on debt to, increasingly, people who live overseas and have loaned the US government money.

Of those, the scariest, the piece of the budget that is the largest, and that is going to grow the fastest in the coming decades, too, is the entitlement part. It’s Medicaid, Medicare, and Social Security. And it’s not even funded. The Congress has promised these benefits to people without coming up with a way to pay for them.

Remember, were talking liabilities, here, and unlike Defense spending, which has been fairly constant over the last forty years, entitlements will grow at a rate faster than tax revenues.  Because they are unfunded, and because they will grow rapidly over the coming decades, the government will need to borrow to pay for them. As  a result, as they grow, they’ll be paid for with more debt, which will increase the size of the interest payments.

Check it as Gross explains the danger:

The above four multi-trillion-dollar liability balls are staggering in their implications. Remember first of all that the nearly $65 trillion of entitlement liabilities shown above are not some estimate of future spending. They are the discounted net present value of current spending should it continue at the projected demographic rate (importantly ­– it is much higher than the annual CPI + 1% used as a discounter because demand for healthcare rises much faster than inflation.) And while some Honorable Congressional Le Pews would counter that Medicaid is appropriated annually and therefore requires no discounted reserve, those words would surely count as “sweet nothings,” believable only to those whom they romance every several years at the polls. The incredible reality is that the $9.1 trillion federal debt that constitutes the next-to-tiniest ball in our chart is nothing compared to unfunded Medicaid and Medicare. It is like comparing Pluto to Saturn and Jupiter. The former (the $9.1 trillion current Treasury debt) does not even merit planetary status in our solar system of discounted future liabilities. It’s really just a large asteroid.

Look at it another way and our dire situation becomes equally revealing. Suppose that the $65 trillion of entitlement liabilities were fully funded in a “lockbox,” much like Social Security is falsely imagined to be. Just suppose. And say the cost of that funding (Treasury debt) was the same CPI + 1% that was used to produce the above discounted present value in the first place. Actually, that’s not a bad guesstimate for the average yield of all Treasury debt. If so, then the interest expense on the $75 trillion total debt would equal $2.6 trillion, quite close to the current level of entitlement spending for Social Security, Medicare and Medicaid. What do we pay now in interest? About $250 billion. Our annual “lockbox” tab would rise by $2.35 trillion and our deficit would be close to 15% of GDP! The simple conclusion would be this: Unless you want to drastically reduce entitlement spending or heaven forbid raise taxes, then Pepé, you’ve got a stinker of a problem.

What would happen if we threw in agency debt and student debt, too, liabilities that the federal government insures?  Add another $65 Trillion to the debt side of the balance sheet.

Oh, and what about the assets side? Well, if our GDP is $14.9 Trillion and our tax revenues are estimated at about 35% of GDP, then do the math: we’re on track to never pay down our debt.

Indeed, because entitlement costs are going to continue to grow, and faster than inflation, sometime in 2040, mandatory budget items will exceed government revenues (or taxes collected).

Ouch. As Gross says, were out Greeking the Greeks with our debt, here.

In the real world, when things get this bad for a company, or for a person, they become insolvent. Since were talking about a country here, and not just any, but one of the most successful countries, bankruptcy is not exactly an option. It would destroy the world economy.

Instead, Gross anticipates four avenues the government can take to diminish it’s debt problems, none very attractive, and none very wise:

  1. Contractual abrogation. In other words, it will stop paying its debts and honoring its contracts. Extremely unlikely.
  2. Speeding up and increasing inflation. Dramatically. He thinks this is likely, but not sufficient.
  3. Push down the value of the dollar. Already happening.
  4. Decrease Treasury yields to historic lows, penalizing savers, and hope not one complains.

Or they could just reform entitlements. Entitlements are the heaviest weight on the federal balance sheet, and they are the part that will grow over the coming decades. Get entitlements under control, and suddenly the federal balance sheet is more manageable.

Who’s going to take it on? It’s political suicide for any serving politician to take on entitlements, and I doubt any of them currently serving has the courage, or the brains, to figure out how to do it.

Maybe it’s something that takes a whole generation. Maybe it’s time for the Baby Boomers to step forward. As Michael Kinsley recently wrote in The Atlantic Monthly, maybe it’s time for the descendants of the Greatest Generation to step forward and take one for their kids. Maybe it’s time to take one for the team:

So what do you give the country that has everything? You give it cash. The biggest peril Americans now face isn’t Islamo-fascism. It’s our own inability to live within our means. It would be nice to give our country the wisdom and self-discipline to stop running up the credit card. And we should try. But it’s unlikely that we can remake the national character (including our own) in 19 years. What we can do is offer a lecture and a fresh start. We should pass on to the next generation an America that’s free from debt. Instead of ignoring it, or arguing endlessly about whose fault it is and who should pay for it, Boomers as an age cohort should just grab the check and say, “This one’s on us.”

(h/t to PIMCO)

When is $100 billion not enough?

When it’s non-security discretionary spending cuts from the budget. That’s when.

Then it’s just not solving the problem. It’s pandering for the press and for constituents.

The problem, and all the talk Washington, is the deficit and getting it back to a manageable level.  Republicans in an effort to keep campaign promises and reduce the deficit, are working on cutting $100 billion out of the budget. The problem is, what they are cutting is just non-security discretionary spending. The real cause of deficit growth–and the looming monster on the horizon–is entitlement spending (Social Security, Medicaid, and Medicare) and interest payments on the federal debt. See, those two items will grow, under the Congressional Budget Office‘s projections, dramatically over the next decade. By 2024, tax revenues will not be enough to pay for the costs of entitlements and net interest payments.

Check it:

But isn’t $100 billion in cuts a good start? Yes…but no. It won’t affect the growth of entitlement spending a bit. Nor will it increase tax revenues (except perhaps to depress them) to pay for the growth in spending. Derek Thompson of The Atlantic likens it to a dentist telling you that you need to brush more or your teeth are going to fall out.

So you buy a toothbrush and you brush one tooth really really really hard for six months but leave the others untouched. By the time you return to the dentist, your teeth are all rotting except for one tooth that is so overbrushed, you’ve worn out the enamel.

Instead of helping your whole mouth, you end up hurting it, including the place you were focused so much. I don’t agree that discretionary spending cuts will hurt as much as that (such as, why does the federal government need to fund cowboy poetry?), but I do think they distract from the real problem that needs addressing–the cost our entitlements will levy on our country in the coming decade.

So why not work on entitlements instead of non-security discretionary spending? Why not stop chopping at the leaves and take the ax right to the trunk?

Because it’s hard and politically dangerous. The largest recipients of entitlement spending also tend to be regular and frequent voters. They are those who are in need. While polls tend to show that almost everyone agrees that cuts must be made, they also show that no one really wants to cut what they benefit from nor do they want the alternative of paying higher taxes.  And what rational congressman wants to go back to his district and tell them that he cut benefits to the poor, the elderly, or the sick?

Yeah. That’ll go over like a lead balloon.

Enter the dragon. Or rather, enter Rep. Paul Ryan, a Republican from

Paul Ryan (politician)

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Wisconsin, and his planning to bring the budget back under control. He acknowledges that what he proposes–throttling back entitlement spending– may not necessarily help Republicans in the short-term.

“Is this a political weapon we are handing our adversaries? Of course it is,” Ryan said Thursday. “I think everybody knows that we are walking into I guess what you would call a political trap that arguably we are setting for ourselves … but we can’t wait. This needs leadership.

“If you just follow the polls, you are nothing but a follower,” Ryan said.

His budget is likely to shift the discussion from cutting discretionary spending to entitlement reform, something that President Obama notably left out of his budget when he proposed it to Congress.

While what exactly Ryan will propose is still unclear, and will be until April, it is speculated that the proposal will call for shifting Medicaid to block grants so as to limit how much growth can happen in a single year, as well as potentially a voucher system for Medicare recipients. Social security, the least problematic of the three, will probably remain untouched, for now (though, IMO, it’s still a payment I make every month that I’ll never see).

As long as voters vote for the short-term, we will all pay in the long-term.

Of course, as Keynes put it, rather without vision, “in the long run, we are all dead.”

The Human Cost of Ignoring Medicaid Reform

One of the critiques that my left leaning friends often level at the political right is that Republicans are cold and heartless.

Republicans are the champions of big business and soulless capitalists, they say. They don’t care about the poor, the elderly, or the weak of society.

It may be a valid critique, if a little superficial.  Republicans do tend to find support in the business community. However, the critique ignores the other costs to our society that come when we do not adequately consider that if we spend a dollar here, we cannot spend the dollar there, the cost of government programs intended to care for the poor and needy relative to government’s other functions.

I recently saw the argument come up during a discussion about pension reform. Right now, a lot of states are facing the very real problem of budget shortfalls, in large part due to the costs associated with pension funds. The pensions funds, invested in the stock market, took huge hits during financial crisis and resulting recession, leaving them underfunded by billions. I noted in a earlier post that one report said that California was dealing with pension costs that were rising at a rate of $5 billion a year, or $1.2 million per employee. On the other hand, non-state employees–the folks paying for the pensions–had on average only $60,000 set aside for retirement.

Utah state Senator Dan Liljenquist lead out reforming Utah’s pension problem, creatively substituting 401(k) type plans for defined benefits plans. It kept benefits in place for state employees, but lifted the burden from the backs of tax payers when dips in the stock market hit investments. Lauded by the Wall Street Journal for getting ahead of the curve, other states are looking at Utah’s plan closely as they grapple with similar pension fund short-falls.

And here is where opponents of pension reform cry foul. You’re taking away what we are owed, they say.  For example:

It’s not my fault, they say.

Agreed. It was a bad bet by the legislature. But is it fair that a small segment of society reap the benefits at the cost to the rest of us? There is a very real human cost to these entitlements, and failure to compensate for those costs would be immoral.

Let’s look at Medicaid for an example of an entitlement that if unreformed will have a very real and painful human cost. Says Senator Dan Liljenquist about Medicaid’s increasing costs to the state:

“Ten years ago, Medicaid required nine percent of the state’s funds. This year Medicaid ate up 18 percent. By 2020, just nine years from now, 36 percent of our budget will be directly allocated to Medicaid. It’s like Pac-Man,” Liljenquist explains.

“Medicaid’s present growth rate is ravaging the state’s available funds and is completely unsustainable. Right now, 60 percent of the budget funds education. If that portion remains consistent through 2020, and we are committed to paying 36 percent to fund Medicaid at that time, then we are left with the remaining four percent of the state’s budget to take care of everything else.”

What does that really mean, though? What does 4% have to cover? Sen. Liljenquist goes on:

“We will either need to raise taxes substantially, lay off 20,000 school teachers, close down three of our universities, make extreme cuts to Medicaid rates or opt out of Medicaid entirely, as some other states are considering at this very minute.”

So we cut a university or two. So what? According to Utah.gov, Utah has five public universities and five colleges or technical schools. Can you imagine the impact of shutting down Weber State University, Utah State University, and Utah Valley University? Utah has one of the most educated workforces in the country, an important reason the recession has had a lesser impact on Utah than other states. Losing that workforce, or forcing Utah students to go to other states for their education, would eviscerate Utah’s competitive advantage and business environment.

How about teachers? In 2005, the last year I could find data, Utah had only 22,993 teachers (out of 45,821 employees in the public ed system…which makes me wonder: why are there more non-teachers than teachers in public education?). Cutting 20,000 teachers, then, is a non-starter. But the money has to come from somewhere…

Your suggestions? How does Utah deal with the rising costs of Medicaid–whether caused by increasing need among the poor and elderly or by expansion through the ACA–and still provide for the needs of the rest of its citizens? Roads, schools, universities, and basic government services?

There is a very real human cost to leaving these entitlements unreformed. While initially well-intentioned, entitlements like Medicaid have become a runaway train dragging budgets away from other governmental priorities that are as important to the functioning of society as caring for society’s unfortunate. If we do not reform Medicaid to compensate for these growing costs, we will see even more people finding themselves among the needy.

(h/t Utah Policy guest column “Liljenquist Tackles Medicaid Reform” by Chuck Gates)

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Who motivates you?

I drove with several friends to hear a state senator speak about Medicaid reform (an interesting topic addressed by Senator Dan Liljenquist, one that perhaps I’ll write about at a later date, but not right now). They, my friends, are articulate and intelligent individuals, and as I got back into my own car after being dropped off at our rendezvous point, I found myself thinking: “I’ve got to read and study more if I’m going to keep up with these guys.” We discussed constitutional law, problems of capital punishment, presentation and speech styles, the course of our culture and America, favorite books, history (we’re Teddy Roosevelt fans because when he got up in the morning, he made stuff happen), and more. It was interesting, it was mentally invigorating, and it was fun.

And here’s the thing: they aren’t the only smart and ambitious and accomplished people that I have met and become friends with over the years. But all of them have made me, if just through the pressure of wanting to measure, or keep, up, a better me.

The people I spend time with are a huge motivation in my life. I’ve been fortunate to interact with people who are driven, focused, and ambitious, and it brings out the best in me. I’m a pretty average, normal guy, but by associating and interacting with smarter and more ambitious people than myself, as well as forming relationships with them, I feel like they’ve pulled me along and helped me form a better me than I would have been otherwise.


And lest I forget, my wife deserves special mention as one of those people, unique in her abilities, talents, beauty, and gifts. Thanks for keeping me going, Britt.

Who motivates you?

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