Debt Commission: The Good, Bad and Ugly

President Obama’s debt commission has put out a set of proposals to deal with the problem of the ever-growing federal debt. The proposals are actually more of a trial balloon and they are endorsed not by the full commission, but only by its two co-chairs, former  (Democratic) White House aide Erskine Bowles and former (Republican) Senator Alan Simpson. See our previous post and the full PowerPoint set of proposals.

The Good. The co-chairs make a strong case that we need reform and we need it now. If we continue on the current path:

• Federal debt will equal 100% of GDP by the middle of the next decade.
• It will equal 200% of GDP ten years after that.
• We will be spending $1 trillion on interest alone by 2020.

Further, their proposals manage to gore just about every ox in sight — perhaps to underscore that everyone has a vital interest in solving this problem.

Alerting the public to the seriousness of our financial problem is the commission’s most important job. Sad to say, but the political left (including much of left-wing academia) is still in denial. “Count me among those who always believed that President Obama made a big mistake when he created the National Commission on Fiscal Responsibility and Reform,” wrote Paul Krugman in The New York Times the other day. “The deficit commission should be told to fold its tents and go away.” Krugman has repeatedly claimed that any problems in Social Security and Medicare are decades away (because of the trust funds), echoing the position of many Democratic members of Congress.

Most of the health policy community is also in denial. The National Center for Policy Analysis is one of the very few organizations that regularly reports and comments on the Medicare Trustees’ estimate of the unfunded liability in Medicare. In the 2009 report, that debt was $89 trillion, or six times the size of the U.S. economy. Yet Uwe Reinhardt has responded to several of our blog posts by pooh-poohing the concern. (Here is a particularly colorful response.)

The commission wisely focuses only on cash flow and ignores the Social Security and Medicare trust funds — perhaps on the assumption that knowledgeable people already know that you can’t pay bills with IOUs you have written to yourself. In addition, there are specific proposals that are especially commendable:

• Reforming the tax code to produce a top rate of only 23% or 28% if popular deductions, exclusions and credits are retained.
• Turning Medicare into rational insurance — protecting seniors from catastrophic costs while leaving them to pay small bills from their own resources.
• Moving to premium support for Medicare — with the government paying for core insurance that we want everyone to have and leaving seniors to pay for extra insurance on their own.
• Raising and indexing the retirement age under Social Security.
• Putting cost-of-living adjustments for Social Security and other benefits on a more sensible basis.
• Slashing farm subsidies, cutting defense and capping the federal government’s share of the economy at 21%.

The Bad. There is a difference between a proposal and a wish. The items listed above are proposals. But when it comes to controlling health care costs, what we get are hopes, not real policy options.

As noted in a previous post, David Henderson and Arnold Kling discovered that eliminating the deficit by cutting only spending is a breeze when you use The New York Times deficit-reduction calculator. Ezra Klein explains why: the real cause of long-term budgetary doom is health care spending on old people. Like the debt commission, the New York Times’ calculator lets you hold Medicare spending to GDP + 1% without ever explaining how this could be done.

The commission’s PowerPoint recommendations also are no better than the Affordable Care Act (ACA) enacted last spring. In fact, more than half of the commission’s goal has already been accomplished with the passage of the ACA!

Remember, more than half the cost of health reform over the next ten years is to be paid for by cuts in Medicare spending. Going forward, the cuts continue indefinitely into the future and wipe out more than half the unfunded liability under Medicare!   How is this possible without significant harm to the elderly and the disabled? No one is able to say. The bill creates bureaucratic hopes (pilot programs, comparative effectiveness research, accountable care organizations, etc.) and when all else fails, calls for cuts in payments to providers. According to the Medicare actuaries, this means Medicare payments will fall below Medicaid’s by the end of this decade and will equal half of private fees by midcentury.

Are you willing to see senior citizens in a separate health care system — say, being cared for in ten-bed wards with no television, no choice of meals and no access to the latest medical technology? If not, then the ACA’s plans for the future are politically unacceptable.

The commission recommends doubling down on this completely unrealistic way of thinking about cost-control — even calling for a global budget for the growth of Medicare spending. Yet other countries with global budgets have been no more successful than we have. Over the past four decades, real per capita health care spending growth in the U.S. has been just below the OECD average.

We need to control health care costs. Wishing they were controlled is not the same thing as a plan for controlling them, however.

The Even Worse. The commission calls for deficit reduction that is 75% spending cuts and 25% tax increases. Many conservatives will find the 25% unacceptable. I am not among them. I would be willing to pay more in the short run if I can be assured that I will pay less than I expect to pay in the long run. The health care hocus pocus described above doesn’t assure me.

More importantly, we will never solve the long run problem of elderly entitlements unless we change their fundamental structure. We must replace the pay-as-you-go-Ponzi-scheme finance we now rely on with funded programs in which each generation pays its own way. More than 30 countries have either fully or partially done this with retirement pensions. We must do it with health care as well.

At the NCPA, we have shown how to do this with Social Security and Medicare. Prudence suggests we also include the senior citizen parts of Medicaid. If we want to reach midcentury with a tax burden no greater than the one we have today, we must begin immediately, putting a portion of everyone’s payroll into private savings accounts.

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