deficit


The House Bill: A $10 Trillion Unfunded Liability

Amid all the flurry of news in the hectic last days before the House recessed for the August break, something important went largely unnoticed — a development that should be the knockout blow to the kind of sweeping health-care bill the Obama administration is pushing, at least as it has been cobbled together in the House.

In a July 26 letter to the Ranking Republicans on four key committees (Ways and Means, Energy and Commerce, Education and Labor, and Budget), the Director of the Congressional Budget Office (CBO), Doug Elmendorf, made it clearer than he ever had before that the bill, in its original July 14 form, would dramatically widen the already large gap between long-term government revenue and spending. Here’s the key paragraph:

Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time. The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.

In other words, CBO expects the spending in the bill would grow at a rate of least 8 percent annually into the indefinite future, while the revenue to pay for it will only grow at about 5 per cent per year. Hence the “substantial increases” in federal budget deficits beyond 2019.

Although CBO declined to specify any actual deficit numbers beyond 2019, they can be easily calculated, in rough terms, from the information provided in Elmendorf’s letter.

By 2030, if the spending associated with the coverage provisions rises 8 percent per year after 2019 and the revenue rises by 5 percent, the bill would add more than $200 billion per year to currently projected budget deficits. By 2048, the annual deficit increase would top $1 trillion — and only go up from there.

Of course, the federal government is already in a deep hole due to the projected rapid cost increases in Social Security and Medicare. The trustees for those programs reported earlier this year (see here and here) that Social Security’s seventy-five year unfunded liability stands at $5 trillion, while Medicare’s has reached at an astounding $36 trillion.

It is possible to do a similar “unfunded liability” calculation for the new entitlement spending in the House bill. Assuming a discount rate of 5.7 percent per year, the bill would add more than $10 trillion over seventy-five years in new unfunded government obligations.

Of course, some amendments were adopted to assuage the Blue Dogs in the Energy and Commerce Committee. The fate of those amendments is uncertain at best, however, as Speaker Pelosi has indicated the contents of the yet-to-be-written merged bill from the three committees will be decided later (to attract votes of course). But even if the Blue Dog amendments survive, they would do very little to change the basic direction of the bill’s long-term costs.

CBO recently projected that the federal budget deficit is already on track to reach nearly 15 percent of GDP in 2035, well above the historical average of about 2 to 2.5 percent. The last thing Congress should be doing is making the problem worse with new runaway costs. Indeed, the president himself has said he won’t accept a bill that makes our long-term budget problem worse. How he squares that with full support for the emerging House bill is anybody’s guess.

posted by James C. Capretta | 5:44 pm
Tags: House bill, projected costs, Doug Elmendorf, CBO, spending, deficit, Medicare, social security, Blue Dogs, Nancy Pelosi
File As: Health Care

The Baucus Planís Regressive Employer Mandate

Let’s give the bipartisan “group of six” senators — Finance Committee Chairman Max Baucus and five of his committee colleagues — their due. More than any others, they are responsible for the likely derailment of the House’s massive health care overreach.

Rank-and-file House Democrats — and not just the Blue Dogs — are loathe to vote for a $1.5 trillion spending increase, $800 billion in tax increases, costly mandates on businesses and individuals, and an increase in the federal budget deficit of $239 billion over the first decade (and much more in the years following) if Senate Democrats are going to go in an entirely different direction. Especially not after the “cap and tax” vote, which is going to haunt House Democrats all the way until November 2010. House Speaker Nancy Pelosi as much as admitted that many in her caucus are not going to stick their necks out again when she said Monday night, “We’re waiting to see what the Senate will do.”

While putting up a major roadblock to further proceedings in the House is certainly a praiseworthy accomplishment, that’s about the only good thing that’s likely to come out of what is being worked on by the bipartisan group behind closed doors in the Senate, at least as understood from press accounts of the emerging “Baucus plan.”

On the surface, there is a sense that Sen. Baucus and his colleagues are pursuing a more sensible approach, sensitive to economic concerns and more aggressive on “bending the cost-curve.” But that’s really a false impression. At its core, the Baucus plan contains the same elements that make the House bill flawed and the first step toward a full governmental takeover of American health care.

It all starts with the Democratic insistence on “universal coverage.” With that as the non-negotiable goal, the Baucus plan goes down the very same road as the House bill, with costly and regressive employer and individual mandates which essentially force tens of millions of people to sign up with a plan offered at the workplace, whether they want to or not.

Today’s news coverage is filled with stories indicating that the group of six has apparently agreed not to impose a mandate on employers, opting instead to impose a “free rider tax” on firms whose workers end up getting subsidized coverage in the so-called “exchanges.”

But this is a distinction without a difference. Businesses not offering insurance today would still be forced to pay a hefty fine for all of their workers who got newly subsidized insurance through the so-called “exchanges.” That’s the exact same concept behind the House’s “pay or play” employer mandate. Employers either get their workers into job-based plans — or else. How is that not a mandate? Yes, there may be more flexibility for firms regarding what they actually have to provide in the Baucus plan. And because workers above 300 percent of the poverty line won’t be eligible for subsidization, their employers may not have to pay a fine for not offering insurance to them. But the reality is that just about every firm has some low wage workers on their payroll, which means the vast majority of employers will have to organize and pay for insurance for all of their employees to avoid getting fined for those who might end up in the federal subsidy program.

Of course, what has not been mentioned enough is how regressive this all is. Employers don’t “pay for” health insurance. In competitive labor markets, they reduce what they pay out in cash by the premiums they must pay for health insurance. In other words, it’s always the workers who pay for a job-based health plan. In both the House bill and the Baucus plan, tens of millions of low- and middle-income workers will be forced to sign up for employer-organized insurance, with no additional help from the government. That will mean large pay cuts as uninsured families are forced to pay expensive premiums they don’t today. That’s the way the authors of these bills are able to say they are “covering everybody” for “only” $1 trillion. Indeed, the health care bills under consideration in Congress — including the Baucus plan — would cost much, much more if the Democratic sponsors of them weren’t so willing to make the very workers they say they represent pay massive and regressive hidden taxes.

posted by James C. Capretta | 10:37 am
Tags: Max Baucus, Blue Dogs, mandate, deficit, cap and tax, Nancy Pelosi, House bill, universal coverage, mandate, free rider tax, pay or play
File As: Health Care

The Prognosis for ObamaCare

The House bill would add $239 billion to the federal budget deficit over the coming decade, according to Congressional Budget Office (CBO) projections. That’s bad enough, coming as it would on top of the $11 trillion in deficits that are already expected to occur over the period 2009 to 2019 under the Obama budget plan.

But that’s really just the beginning of it.

Yesterday, CBO confirmed that the House bill would do even more fiscal damage in its second ten years. Here’s the crucial paragraph, from a letter sent by CBO director Doug Elmendorf to the four Ranking Republicans on the key House committees:

The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year-budget window.

That really should do it. The Blue Dogs are in this fight, in part, because of their stated concerns over growing budget deficits and unaffordable entitlements. The president reiterated again last week that he is determined to sign a bill that slows the pace of rising costs and improves our long-term fiscal outlook.

Well, here’s a bill that would go in exactly the opposite direction from what the authors say is their objective, according to CBO. It would add a third runaway health care entitlement program to the two already on the books (Medicare and Medicaid) with no prospect in sight that spending on any of them will ever come in line with the government’s revenue base. A back-of-the-envelope estimate indicates the House bill would run up a cumulative federal budget deficit of at least $700 billion in its second ten years, and possibly much more. That’s on top of budget deficits that are already unsustainable and that will put the American economy at considerable risk of crippling interest rates or hyper-inflation.

This is not a close call. The Democrats have no choice. For the sake of the country, they have to go back to the drawing board and work with Republicans on something much more sensible.

[To read the NRO symposium on ObamaCare in which this post originally appeared, with Newt Gingrich, David Gratzer, and Amy Menefee, click here.]

posted by James C. Capretta | 12:50 pm
Tags: CBO, deficit, ObamaCare, House Bill, Doug Elmendorf, Blue Dogs, projected costs
File As: Health Care

The Presidentís Reckless and False Health Care Claim

It’s now a clear pattern. When the president senses his position is vulnerable to a factual criticism, he asserts emphatically that the opposite is true — without ever providing evidence to back up his claim.

Here’s the latest example. According to Politico, President Obama told skeptical Blue Dog Democrats last evening that they should support the health care bill emerging in the House because it would produce savings beyond the ten-year budget window.

Oh really. Says who?

The context here is crucial. It’s already abundantly clear that the federal government cannot afford its existing health care commitments. The Congressional Budget Office (CBO) recently projected that Medicare and Medicaid costs will nearly double in twenty-five years, from 5.3 percent of GDP today to 10.0 percent in 2035 (this assumes continuation of current policy with regard to physician fee updates). The Medicare Trustees projected in May that the program’s 75-year unfunded liability has reached $36 trillion.

Moreover, the federal government is projected to run massive budget deficits for the foreseeable future. In 2009, the government has already run up a deficit of $1 trillion through June, and it could reach $2 trillion before it’s over at the end of September. CBO expects the Obama budget plan would increase the government’s debt by $11 trillion from the end of 2008 to the end of 2019. Running up government debt at that kind of pace would put the nation’s economy at considerable risk, to put it mildly. At some point, lenders would demand higher returns for their lending, pushing interest rates up and choking off growth, or the Fed would partially monetize the debt with even easier money and rapid inflation.

It is in this context that Democratic leaders in the House and Senate are trying to rush health care bills to their respective floors for consideration before the August congressional break.

The centerpieces of the bills are the creation of a new, massive entitlement to health insurance subsidization and a large expansion in Medicaid eligibility. The House bill, unveiled today and available here, would add $1.2 trillion in federal costs over a decade with just these two expansions, according to CBO. And the trend is even more alarming. Between 2018 and 2019, federal costs for the new entitlement and the enlargement of Medicaid would increase by a combined 8.9 percent.

That shouldn’t be surprising though, because that’s basically the rate at which Medicare and Medicaid have been growing for more than four decades. And there’s nothing in the House or Senate health care bills which would lead one to assume a new health entitlement program will grow at a more moderate pace in the future than the ones already on the books have done in the past. CBO has said repeatedly that slowing the pace of rising costs will require a fundamental restructuring of financial incentives, for consumers and suppliers of medical services. Nothing currently on the table in Congress comes close to meeting that test.

That was essentially the message CBO delivered to members of the Senate Health, Education, Labor, and Pension committee last week. In response to a question from Sen. Judd Gregg, CBO Director Doug Elmendorf said a bill which simply expanded coverage without fundamental reform “puts an additional long-term burden on top of an already unsustainable path” (Elmendorf’s testimony can be seen here, with his response to Senator Gregg at the 1 hour, 38 minute mark).

Moreover, it seems that President Obama’s own budget director agrees with CBO. Last week, Peter Orszag delivered a letter to House leaders saying their bill doesn’t go nearly far enough to slow the pace of rising costs. But even that didn’t stop the president from saying otherwise in his desperate attempt to round up votes.

The federal government’s budget is already knee-deep in debt, largely because politicians have promised that better days ahead will make all budgetary problems go away. They haven’t, and the current president is making the situation much worse. The last thing any member of Congress should do is simply take the president’s word for it that the health care bills under consideration will ultimately “bend the cost-curve.” If he really believes that — because no one else really does — he should provide some hard evidence to back up his claim. And that’s not a theoretical possibility. He could ask his independent projection experts — not his political appointees — to provide directly to Congress and the public, without review by anyone else, their best estimates of what these bills would do to the long-term (25- or 50-year) budget outlook. Those estimates would be taken much more seriously than unsubstantiated assertions which run against commonsense and all evidence.

posted by James C. Capretta | 9:11 am
Tags: ObamaCare, Blue Dogs, House bill, CBO, projected costs, deficit, HELP, Doug Elmendorf, Peter Orszag, cost-curve
File As: Health Care

Rushing Headlong Toward a Crisis

President Obama has made passage of an expensive new entitlement to health insurance his top legislative priority this year even as it has become abundantly clear that his fiscal policy is driving the country headlong toward a crisis.

In June, the Congressional Budget Office (CBO) took another, more complete look at President Obama’s budget plan and found the following: a $2.7 trillion spending increase over ten years, not counting the full costs of a health-care plan; annual deficits exceeding $600 billion every year — and rising as the years pass; a cumulative ten-year budget deficit of $9.1 trillion; and $17 trillion in government debt at the end of 2019.

And that might be the rosy scenario.

For starters, there are the budgetary risks associated with Obamacare. It’s all but certain to have additional deficit spending in its early years, which is why the president wants to change the traditional budget rules and require a deficit-neutral bill only over a full decade. That means all of the “financing” can be back-loaded, and later pushed back again. Sort of the “glad to pay you Tuesday for a hamburger today” version of budget discipline. Moreover, CBO has already estimated that the cost of the new health-insurance entitlement program in the Kennedy-Dodd legislation would rise very rapidly — 6.7 percent per year — when fully implemented. So even if the bill is “financed” over ten years, over the longer run, it will add to the massive unfunded liabilities associated with Medicare and Medicaid.

Then there’s the interest rate assumptions used to make the ten-year projections. Many forecasters, including CBO, use rather benign assumptions of where real interest rates are headed because the economy is expected to remain soft for some time. But what if the flood of government debt leads some important lenders to demand higher returns?

Yesterday, CBO provided some illuminating projections of what would happen under just such scenarios. For instance, if interest rates on government debt in the coming decade roughly tracked the experience of the 1980’s, the Obama budget plan would run entirely off the rails in very short order. By 2014, the annual deficit would exceed $1.1 trillion, and it would cross $2 trillion in 2019. Over ten years, the higher interest rates alone would force the government to borrow an additional $5 trillion, with the nation’s debt topping $22 trillion at the end of the decade — or more than 100 percent of GDP.

But even if interest rates followed a path closer to what the latest Blue Chip forecasts indicate, the nation’s debt will still rise more rapidly than CBO’s base assumption would indicate. Instead of $17.1 trillion of debt at the end of 2019, it would be $18.3 trillion. And the deficit in 2019 alone would exceed $1.3 trillion.

The Obama administration is pursuing a reverse of the “starve-the-beast” strategy. Pile on spending and new programs in the current recession, and then, after the fact, push for the mother of all tax increases as the only way to defuse the ticking time bomb of runaway government debt. Fortunately, the public is beginning to stir. They have seen spend-and-tax before, and it’s not what they thought they were voting for in November.

posted by James C. Capretta | 10:08 pm
Tags: ObamaCare, CBO, deficit, HELP, projected costs
File As: Health Care

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