3. Obamacare will add an unsustainable entitlement that will increase the national debt, requiring higher taxes in the future that will negatively impact economic growth.
Can you imagine balancing your checkbook by counting 10 weeks of revenue versus 6 week of pay-outs to produce a net plus in your balance? Or running your business in such a manner? By Washington standards, this bill does that-- just substitute weeks for years.
For an in-depth look at the accounting gimmicks in this bill, the person who really explains this best is Rep. Paul Ryan who takes Pres Obama to task on this:
Former CBO director Douglas Holtz-Eatin estimates that if you strip the accounting gimmicks from the HCR bill, the cost of Obamacare over the next decade will add at least $562 billion to the deficit. In the long run, it’s likely much higher as the numbers of insured rises, and consume more health care.
My liberal friends often say regarding the deficit: You Republicans are a bunch of hypocrites—you guys drove up the deficit! (Note: while the budget deficit refers to the difference between government revenues and expenditures, national debt refers to total $ the government owes. You can think of debt as accumulated deficits, which the government funds through borrowing by selling Treasury bills, savings bonds, etc. Our national debt is the money owed to holders of those bonds and bills. I use both terms in this section as appropriate). They point out Reagan drove up the deficit, Clinton had a budget surplus, and Bush 43 ran a deficit. While Bush 43 did increase entitlement spending with the prescription drug benefit for Medicare, most economists generally accept deficit spending is legitimate when you’re financing wars. This is not a value judgment on the wars we’re in; it’s merely to point out that historically, deficits due to wartime spending are normally temporary. The deficits under Reagan can largely be attributed to an increase in defense spending during the Cold War, and Bush 43 had to deal with 9-11. Clinton’s air war on Serbia lasted only 76 days. So overall defense spending should eventually come down as we start executing exit strategies from Iraq and Afghanistan (unless of course, Congress decides to expand the military or buy expensive new weapons systems). The deficit during the Reagan years were partially offset by the largest peacetime expansion of the economy due to his tax cuts. After the Cold War was over, the deficit was further tackled by his successor, Bush 41, who cut military spending with the “peace dividend,” and raised taxes (remember the latter part of that didn’t turn out so well for him). Clinton continued the trend of cutting defense spending.
Further this type of fingerpointing of he-created-deficits-too does not distinguish between a cyclical deficit produced by the business cycle, and a structural deficit that is made up of entitlement spending. Megan McArdle sums this up well:
As I've been writing about the deficits, one of the things that occurs to me is that conservative and liberal policy analysts are really talking past each other on this issue, because they're talking about different sorts of deficits. Liberals are focusing on the cyclical deficit, which is not a big problem. Conservatives are talking about the structural deficit, which is a huge problem. And so one side says, "the deficit is a problem," and the other side says, "the deficit is manageable," and both sides are both right and wrong.
Cyclical deficits are the kind of deficit you run when you lose your job: you've had a temporary income shock, and so you're going to be spending more than you take in. In the case of government this is actually a good thing -- "automatic fiscal stabilizers" like welfare, unemployment insurance, and food stamps keep recessions from being as bad as they used to get. (I know you think this recession is bad, but trust me, in neither absolute misery, nor the size of the relative decline, does it even approach the convulsions of the Great Depression, or several of the 19th century "panics".)
Even if you think the government shouldn't be doing stimulus spending, cyclical deficits just aren't that much of a problem. We have a recession on the order of this one about once every thirty years, which turns even a $1.3 trillion dollar deficit into a manageable $43 billion per year, or less than $200 per person. Given the misery that would obtain if we slashed outlays to meet intake, or raised taxes, that's not a terribly bad sum for what you might think of as Great Depression insurance. Plus the debt's going to be eaten away by inflation, so it will cost even less than that in real terms.
The problem is our structural deficit: the mismatch between our spending and tax revenues that remains even when the economy is just plugging along. That mismatch was manageable in the pre-Obama era; as long as your debt is growing at roughly the rate of your GDP, or less, even persistent structural deficits can be tolerated. (I don't think they should be--but they will not drive either your economy, or your government, into serious trouble.) But as the structural deficit begins to exceed the rate at which the economy is growing, you rapidly start to run into trouble. Interest payments start to grow as a proportion of your budget, and as they get bigger, the size of the tax increase or spending cuts needed to close the budget deficit starts to grow. Naturally, the bigger the tax hike or spending cut required, the less likely it is to happen.
To put it in a historical perspective using OMB numbers, our debt is approaching its highest point in history—the only time it was higher was during WWII.
Defense spending is discretionary spending that rises and falls as determined by the administration. Congress must appropriate for discretionary spending annually. While it’s not politically easy to cut defense spending, it has been done numerous times throughout history at the end of major wars, and can be done if necessary. Mandatory spending, on the other hand, is entitlement spending that is signed into law. It cannot be changed unless there are changes to the law; money must be paid out to those entitled to it according to the law. Politically, it’s nearly impossible to cut. Entitlement spending has continued to grow with social security, pensions, Medicare, Medicaid, and now the recent health care entitlement plus direct lending of student loans to boot. Mandatory spending makes up ~ 60% of overall government spending. If you add interest to pay down the debt, mandatory spending approaches about 2/3 of all government spending. Defense makes up about half of discretionary spending. The bottom line: Even with cuts in defense due to a theoretical drawdown, the debt is not going to greatly decrease due to the upward trajectory of health care spending. The GAO also confirms that entitlement spending is unsustainable:
The projected growth in entitlement spending under current law – chiefly for Social Security, Medicare, and Medicaid – will ultimately affect every citizen in the nation. Continued growth in health care costs is expected to cause government spending for its major health programs to grow faster than both the economy and Federal revenues over the next 75 years2 . Similarly, population aging is expected to cause the Government’s Social Security and health program costs and expenditures to increase as a share of GDP over that period. Consequently, total Government expenditures are projected to exceed total assumed revenue throughout the projection period, with the fiscal imbalance – between spending and revenue – growing larger each year into the future.Keep in mind social security has gone into deficit already, and even with a brisk economy recovery, demographic forces will overtake the fund starting in 2014 and outlays will exceed revenue every year afterwards. When it scored the President’s 2011 budget, which included changes to health care, the CBO is projecting the national debt will increase to reach 90% of the GDP by the end of 2020:
The CBO determined that 1/3 of increased spending for mandatory outlays results from the proposed changes to health care—this assumes Medicare physician rates are frozen until 2020. The CBO included a drop in spending for wartime operations from roughly $160 billion requested annually (based on FY2010 and 2011 numbers), to a $50 billion placeholder each year after 2011.
And the impact of that number is explained by an opinion piece titled "When Deficits Become Dangerous--Stunningly Expensive Big Government" in the WSJ by Michael, Boskin, professor of economics at Stanford University who chaired the Council of Economic Advisers under President George H.W. Bush:
Ken Rogoff of Harvard and Carmen Reinhart of Maryland have studied the impact of high levels of national debt on economic growth in the U.S. and around the world in the last two centuries. In a study presented last month at the annual meeting of the American Economic Association in Atlanta, they conclude that, so long as the gross debt-GDP ratio is relatively modest, 30%-90% of GDP, the negative growth impact of higher debt is likely to be modest as well.
But as it gets to 90% of GDP, there is a dramatic slowing of economic growth by at least one percentage point a year. The likely causes are expectations of much higher taxes, uncertainty over resolution of the unsustainable deficits, and higher interest rates curtailing capital investment.
The Obama budget takes the publicly held debt to 73% and the gross debt to 103% of GDP by 2015, over this precipice. The president’s economists peg long-run growth potential at 2.5% per year, implying per capita growth of 1.7%. A decline of one percentage point would cut this annual growth rate by over half. That’s eventually the difference between a strong economy that can project global power and a stagnant, ossified society.
Such vast debt implies immense future tax increases. Balancing the 2015 budget would require a 43% increase in everyone’s income taxes that year. It’s hard to imagine a worse detriment to economic growth.
(For a more in-depth discussion on the debt and likelihood of default, a good analysis can be found by Bruce Bartlett, who’s been a critic of the Bush administration and conservatives, as well as this article by Jeffrey Hummel).
Paul Volcker is publicly talking about a VAT to pay for all our expenditures. Passage of this bill has worsened entitlement spending to the point of steering the Titanic straight towards the iceberg. If this bill remains law, higher taxes and slower economic growth are in the cards for the future.
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