Thursday, April 14, 2011

What the budget says about priorities

Many years ago, a professor in one of my political science classes told us to “look beyond the numbers” when trying to make sense of the federal budget. His point was that budget-making is really about making hard policy choices. The dollar numbers reflect the policy choices made by Congress and the President, he said, so if you want to know what their priorities are, follow the money and see which programs get more or less. This may sound self-explanatory—duh!—but I bring it up now because until yesterday, the budget debate often seemed to be more about the dollars than the policy choices involved. That is, the numbers (achieving a pre-determined level of spending cuts) has been driving the policy, rather than policy (deciding what we want, on a program-by-program basis, and then deciding how much of we can actually afford) driving the numbers. Recall that Republicans promised in their pre-election “Pledge to America” to reduce non-defense discretionary spending by $100 billion out of the current fiscal year budget. How they came up with $100 billion—why not $150 billion, or $80 billion?—no one knows. My guess is that it sounded like a nice and high enough number that they could take to voters concerned about federal spending. After winning control of the House of Representatives, Republicans have worked diligently to find a way to get to $100 billion. (And whether you agree with their proposed cuts or not, they deserve credit for trying to deliver on their promises.) On a purely party-line vote with no Democratic support, the House passed a bill in February to cut spending by over $60 billion (GOP leaders explained that because the federal government already was well into its fiscal year, the $60 billion for the remainder of the year was equivalent to $100 billion spread over an entire year). This budget would have rolled back most “discretionary” spending to 2008 levels while sparing national defense. To get to the number, the GOP proposed deep cuts or elimination of many federal programs. The House’s budget—called a continuing resolution, because it provided continued funding for the rest of the government’s current fiscal year, which ends on September 30—was never taken up by the Democratically-controlled Senate, so it went nowhere. (Keep in mind that the reason why the new Congress has had to rely on continuing resolutions to keep the government open is because the 111th Congress, controlled by Democrats, didn’t even bother to pass a budget for this fiscal year.) Later, the GOP-controlled House and the Democratic-controlled Senate negotiated a short-term continuing resolution with about $10 billion in cuts that ran out on April 8, which the GOP House leadership indicated was another step toward getting to the equivalent of $100 billion in cuts. And last week, they reached an agreement on a budget through the end of the fiscal year that would cut another $39 billion, including cuts in funding for some health programs, narrowly averting a partial federal government shut-down. The fight over the current fiscal year budget, though, is small potatoes compared to the battle over future budgets. Last week, the GOP upped the ante by putting forth a budget proposal, authored by budget committee chair Rep. Paul Ryan (R-WI), to cut projected federal spending by $6 trillion, starting with the 2012 federal budget year, which begins on October 1. Unlike the current budget agreement that mostly affects only this year’s discretionary spending—about 12.3% of the budget—the Ryan budget tackles entitlement spending by fundamentally restructuring Medicare and Medicaid. The federal government would give the states the responsibility to run (what used to be) Medicaid as they see fit—states, not the federal government, would decide who to cover and what benefits would be offered. But states would get almost $1 trillion less from the federal government to help pay for health care for the poor. Medicare would be converted from an open-ended entitlement to a defined contribution model: the government would chip in a set amount for seniors to buy coverage from private insurers, and they would be responsible for any medical costs above that amount. (People who today are age 55 and over would still have the option of traditional Medicare when they turn 65.) The federal contribution would be indexed to overall inflation, not to health care cost increases that consistently have out-paced inflation, so the value of the federal contribution would erode over time, putting more of the responsibility on the enrollee to make up the difference. The Ryan budget would also repeal the Affordable Care Act, and with it, the federal government’s promise to ensure that nearly everyone has guaranteed access to coverage. Finally, the Ryan plan puts all of the deficit reduction on the spending side by cutting taxes by over $4.2 trillion and ruling out any future tax increases. Yesterday, President Obama countered by offering a plan to reduce the deficit by $4 trillion over the next decade. He said he would get to this amount by cutting both defense and domestic discretionary spending; increasing revenue through elimination of tax “expenditures” and itemized deductions for high-earners and allowing many of the Bush tax cuts expire; and achieving savings in Medicare and Medicaid. But unlike the Ryan plan, the President unabashedly pledged to preserve Medicare and Medicaid much as they are today, but with more cost savings by controlling health care spending. Among other savings, he proposed to give Medicare the authority to negotiate drug prices and to give an Independent Payment Advisory Board, created by the Affordable Care Act, more authority to impose cost controls if necessary. I expect that much of the coverage following Obama’s speech will again be about the numbers—how much would his plan cut spending and lower the debt compared to the Ryan budget? But the more important thing is that the Ryan budget and the Obama speech begin to frame the policy choices involved, especially when it comes to health care. As Robert Pear wrote in yesterday’s New York Times, lawmakers “face several fundamental questions: Will the federal government retain its dominant role in prescribing benefits and other details of the program, like how much doctors and hospitals are paid and which new treatments are covered? Will beneficiaries still have legally enforceable rights to all those services? Will Medicare spending still increase automatically with health costs, the number of beneficiaries and the amount of care they receive? Or will the government try to limit the costs to taxpayers by paying a fixed amount each year to private health plans to subsidize coverage for older Americans and those who are disabled?” This is a debate worth having, because it gets at the difficult policy questions and the very different policy priorities of each party, rather than looking at the budget simply as a fight over numbers. Today’s questions: What do you think Representative Ryan’s and President Obama’s budget proposals say about the choices that must be made? How would you answer Robert Pear’s “fundamental question” of whether “Medicare spending still increase automatically with health costs, the number of beneficiaries and the amount of care they receive?” or should “the government try to limit the costs to taxpayers by paying a fixed amount each year to private health plans?”


Steve Lucas said...

I feel the Ryan plan and the President’s plan offer us an opportunity to finally have the discussion we need on medical spending and taxes. I am a business person, not a doctor, so my bias is towards numbers and cost control.

My wife and I have been fortunate to travel and have had the opportunity to speak with people from many countries. Medical coverage is a surprising common topic.

We cannot allow our current payment system to continue into the future. The pay for procedure, in my opinion, is driving healthcare cost. While I am not sure a flat payment per patient will curb spending, we need a different way.

I ran into a person I had not seen for awhile. He related his front line doctor’s frustration with the need to send him to specialist since the doctor was very sure; They would not let him go until they had spent every dime, and done every test possible. The list of test and procedures were staggering.

We must also look at our world position. No longer can we rely on the advantage we had after WW II in manufacturing, research, and product development. Other countries can compete with us in these areas and offer tax advantages to both its corporations and citizens.

Realistically other countries face the same issues we do in terms of controlling medical cost. They also must deal with an aggressive drug and device industry touting the benefits of their product, and use the US as an example of what they should demand of their governments.

Just as interesting, these countries have better outcomes at half our cost.

While I do not see lowering our taxes from current levels as a practical step at this time, raising our taxes will put us at a world wide disadvantage. Raising our 15% interest and dividend rate will only hurt those who have invested in 401K’s and now find themselves struggling in a down market.

Vague claims of controlling cost and fraud are not a solution. We need hard decisions and point by point policy regarding our medical coverage. Paying a fixed amount per patient may move us away from the “do more, make more” current model.

This will increase the importance of the front line doctor. The follow up question is: Will they make more, or will the “system” try to continue making their high returns off of the backs of these doctors?

Steve Lucas

Harrison said...

Rep Ryan's plan is unfortunate. It dismantles Medicare and Medicaid.
The idea that tax cuts are necessary to make the U.S. competitive is baseless. There is no historical precedent to show this.
The idea is that if wealthy people are taxed less then they will use the money to build wealth and create jobs and grow the economy. The problem with that is that it isn't true. Our economy has done better when taxes have been higher and when government has been forced to create jobs.
With more jobs, more people have money and they spend it and there is then more money in the economy and it grows.
That scenario has historical precedent.
The Hoover administration tried to combat the Great Depression with tax cuts. Hoover believed strongly that the private sector had to grow on its own. That government had no role.
Roosevelt, clearly Hoover's intellectual inferior but a man with a big heart,knew that the government would have to have a role in job creation.
And from 33 to 37 he did pretty well with it.
Then in 37 he was pressured to cut spending, and the result was another couple of years of a depressed economy -- rescued by military spending in 1940.
More recently we cut taxes in 2000, and left them that way despite signing up for a couple of wars, and the result was deficit spending and finally a recession not seen since the Great Depression.

Now we have pressure again to cut spending, and the Republican party is using it as an opportunity to dismantle Soc Security and Medicare and Medicaid.

It is sad.

The President's address yesterday was good.
There is an ideological divide in Washington.

Health care spending has to be controlled, but it will not be controlled simply by denying care to the poor and sick.


Steve Lucas said...

Ultimately the current tax debate raises the question: Is tax policy designed to redistribute wealth or create a basic safety net for those with no other alternatives while addressing issues of national interest.

High taxes create a drag on the economy as tax considerations enter into investment decisions. During the 70’s it was common to buy or a retain business for their tax losses. Both the Reagan and Bush tax cuts generated an increase in Federal tax revenue as people opted out of poor performing investments and sought higher economic returns.

Going back 150 years we can see a boom and bust cycle under various tax situations.

My wife and I were in Paris a few weeks ago and I made the statement to a café owner: France is becoming more like the US and the US is becoming more like France. He corrected me and said: We have become the same.

With an expansion of social services this has drawn in an immigrant group who very quickly access every service available. This has created a sense of entitlement among French nationals with the result of low productivity and ever increasing cost.

Under current proposals Medicare will not change for those who are enrolled or who are about to be enrolled. Medicaid is not solely a Federal function as States must also contribute, and most States have financial difficulties of their own.

As we look around the world we find that Canada taxes interest and dividends at 15% and the first $500,000 of corporate income is not taxed. Germany and the UK also offer tax and other advantages over the US.

The President’s own debt commission has called for a reduction in taxes.

These reductions can only come about with a reduction in cost which brings me back to my original question: Is tax policy designed to redistribute wealth or create a basic safety net for those with no other alternatives while addressing issues of national interest.

I look at taxes as providing a safety net, not as an alternative to work or as a mechanism for redistributing wealth. People in France are quick to point out the distortions of their system and are desperately trying to make adjustments.

We have seen how generous social programs and high taxes do not solve social problems. I really do not want the country to go the way of California.

Steve Lucas

Harrison said...

The President's debt commission called for tax reform and developed a statement that even they could not agree on.
Only the two chairmen.

When you look around the world I think you will find that the US economy is the best investment vehicle in the world and has been for 70 or more years.
Our tax rates will not change that.
The burden that our federal government puts on us is small compared to the over all economy.

What it does however is give us the opportunity to hold our heads up, and it allows the government to provide services that nobody else will.
Like providing health insurance for the sick and elderly.


Steve Lucas said...

America has enjoyed 70 years of world dominance due in great part to political stability and WW II. Untouched by the war our manufacturing capability was intact. The war brought about standardization and allowed thousands to attend college on the GI Bill.

Today China has more English speakers than the US. India, with a population of over 1B, has more college graduates than jobs. This is the world we compete in.

Alan Reynolds April 14 WSJ article highlights how tax revenue has remained stable at about 8% of GDP over the long term. We need to bring our spending into line with this number over the long term.

My only hope is that those in Washington will engage in the same pointed civil debate we enjoy on this blog. We have all lived with decisions we do not like, if, and only if, they solve a real problem.

The time for posturing is over.

I have the deepest respect for Gov. Brown. He is tackling these very issues with a world class economy at stake. As we have seen in California, the decisions are hard, and the politics are even worse.

Steve Lucas

Harrison said...

I too hope that the debate in Washington improves.
I like to think that members of Congress meet with each other away from cameras, and there they talk substantively about what can help their constituents and the country.
I think that there are fewer in Washington now who are willing to consider the merit of an opposing argument.


Harrison said...

David Brooks' column in the NY Times today adds to our conversation.
Please consider reading it.
I think he characterizes the differences between Rep Ryan and President Obama about as well as one can in the space of a single newspaper column.


Unknown said...

Its clear most people already have their thoughts made up. So there is really no room for an objective debate here.

My belief is that there is no constitutional authority for the Federal government to act like an insurer, especially one that runs a legal Ponzi scheme called Medicare. Sorry Harrison, this is what Medicare is. The day we have a smaller number of working young than the retired old people, the scheme starts breaking down. And that will happen over the next 5 years.

My only issue with Ryan's plan is that if that is implemented, then Medicare taxes should be lowered appropriately for those under 55 years old.

Harrison said...

If we change Medicare to a plan where seniors get a fixed amount every year and the opportunity to go off and buy insurance, then it would only be fair for the federal government to step out of health care for seniors completely.
If you are going to give seniors a fixed amount of money, then it will be fair for them (us) to calculate just how much that fixed amount will be and demand that taxes for that purpose match it. If we do that, then it could be equally argued that people should be able to completely opt out of such a system and choose to keep the money and try to invest it or make it into whatever they choose to do with it.

But Medicare as it stands is a mandated health insurance premium. You pay in a mandated percent of your income, and the bargain is that we all have health care costs covered except for co-pays and deductibles which were mainly introduced to prevent abuse of the system.

It has worked remarkably well.
The government has run it with a very low administrative fee.
Private industry could not match it, and has not even come close to matching it in efficiency.

What it has allowed is the growth of technology.
We are able to treat things now because of Medicare that we almost certainly would not have been able to imagine.
By opening up the marketplace of health care to the elderly, we opened up pharmaceutical research and research into products that we would not have otherwise tried to do.
If only the rich elderly could afford care for coronary artery disease how much research would have gone in to stent design or angioplasty techniques?
Would anyone have suggested trials to see if tPA could be used to improve stroke management if there were no money in stroke care?

A voucher program will end Medicare.
And with it we will see a major disruption in over half of our health care industry, which constitutes somewhere between 1/5th and 1/4th of our economy.

I don't think it is a ponzi scheme.
I think our health care industry is strong because of the investment in Medicare.
And I think that our economy is strong because of our investment in health care.

It is not good enough for us to say that we will just have to choose to differ.
We have to examine facts and come to sound conclusions.

Yes there are compromises we can find between Rep Ryan's plan and President Obama's outline.

I hope that the national debate moves forward.