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The Not-So-Grand Bargain



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Some reports this morning suggest that some moderate House Republicans are enamored of a version of the Bowles-Simpson plan being offered up for a vote by Republican Rep. Steven LaTourette and Democratic Rep. Jim Cooper, and might even be looking to that bill as a way to avoid voting for the Ryan budget.

It’s very hard to imagine that any House Republican would want to be caught voting for a budget that keeps Obamacare in place, cuts defense even more than the Obama budget, and—relative to the Ryan budget—raises taxes by $1.5 trillion and increases domestic discretionary spending by over $400 billion.

But most important, the LaTourette-Cooper proposal completely fails to address the chief driver of our coming fiscal disaster: health entitlement spending. The degree to which federal health spending is the heart of our problem is pretty stunning, and tends not to be well understood even by conservatives. One way to think about it is to break down federal spending into two categories: health spending (which includes Medicare, Medicaid, S-CHIP and a few much smaller line items) and all non-health spending combined (which includes everything else except interest on the debt, so in other words defense, domestic discretionary, Social Security, other mandatory spending, all of it). The Congressional Budget Office doesn’t formally break things down this way, but the data it releases along with its long-term budget outlook each year (here is the latest version of that data in an Excel spreadsheet) allows you to do it yourself. What you find is pretty extraordinary.

#more#The federal government got into the business of providing health insurance when Medicare and Medicaid were created in 1965. The two programs took a few years to get fully operational, so to look at their cost trajectories we can look at the past 40 years, during which time both were fully up and running. In 1971, federal health spending accounted for 1% of GDP, and all other government spending combined (excluding interest on the debt) accounted for 17.1% of GDP. Forty years later, in 2011, health spending accounted for 5.6% of GDP and all other spending combined (excluding interest) accounted for…17.1% of GDP—exactly the same portion of the economy as it had four decades earlier. That figure for all non-health spending fluctuated a bit over that time—as high as 18.7% of GDP in 1983 and as low as 12.5% in 2000, while health costs just kept growing—but as it happens it was at exactly the same level last year as 40 years earlier, and it hovered around that figure most of that time. In essence, the net growth in government as a percentage of the economy in the last four decades has been entirely a function of federal health spending.

And on our current course, that trend would continue. CBO projects that under current law, spending on the federal health care entitlements (Medicare, Medicaid, S-CHIP, and Obamacare) will more than double as a percentage of the economy by 2050, while all other federal spending combined will actually decline as a share of the economy. The health-care entitlements are, in essence, responsible for basically all of our disastrous long-term debt problem.

Obviously, long-term projections should be taken with lots of salt, and the CBO is likely underestimating non-health spending in the long term if we stay on our current track, but the historical data and the general trend are nonetheless very clear. If you don’t control the growth of health-care costs, you don’t avert a debt crisis. Spending cuts in other areas obviously help a lot, since money is fungible, but the health-care entitlements are by far the chief causes of our budget crunch, and it will be impossible to keep up with their growth by increasing taxes or by cutting elsewhere. Health-care costs  have to be addressed directly.

The LaTourette-Cooper proposal, like the Bowles-Simpson proposal on which it is largely based, simply takes a pass on this problem, which is the central problem. It just keeps Obamacare and the IPAB (both of which are included in the CBO projections above) and pretends that’s a solution. The most important thing about the Ryan budget is that it proposes an actual reform to address the biggest driver of the cost explosion—the fee-for-service structure of Medicare—and a reform to keep Medicaid costs in check. A reform of the tax exclusion for employer-provided care would have been very helpful too, but even without it the Ryan budget takes on the toughest and most important part of our budget challenge. To pretend that a budget that does nothing on that front is any kind of serious alternative is just irresponsible.



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