Magazine | August 29, 2011, Issue

The Roadmap Back to AAA

Medicare and Medicaid cuts are not optional

The blame for Standard & Poor’s downgrade of U.S. sovereign credit belongs almost exclusively to the president, the most socialistic American chief executive in living memory, but also to key congressional Republicans, who got carried away by their emotions. The president is Lyndon Baines Johnson, and the congressional Republicans are the 70 members of the House and 13 senators who, led by Rep. John W. Byrnes (R., Wis.), voted to create Medicare, a welfare handout disguised as an insurance program and structured as a Ponzi scheme. The handiwork of these illustrious gentlemen has taken some time to catch up with us, but catch up it has.

Take a moment to pity the fellows at Standard & Poor’s, the feckless Mister Magoo of Wall Street. Beavering away at a credit-rating agency is no way for a man to make a living in finance; an S&P drone may earn in a year what a serious money runner earns on a single trade, and his work is held in rollicking contempt by the guys with the big swinging dividends. The credit-rating agencies are basically the nerds who check Wall Street’s math after the fact, putting their official, federally recognized seal of approval on propositions of conventional wisdom that are by definition stale by the time the likes of S&P or Moody’s or Fitch gets around to them. But somebody had to be the first to say it: Uncle Sam is looking subprime. Ask Cassandra how that sort of thing turns out.

S&P wasn’t actually the first, but it was the first firm with a name that insurance salesmen and grocerymen up in Poughkeepsie and down in Albuquerque had heard of, and they have a very fancy office building within view of Wall Street, and that is enough to catch the attention of Pres. Barack Obama, who seems set on being LBJ’s heir at home and abroad.

The United States was downgraded not because it has a heavy public debt, but because its public debt has turned cancerous, and its growth shows no sign of abating. The United States has a metastatic debt for many reasons, the fundamental one being a lamentably juvenile refusal by the American people and their elected representatives to bring spending and taxes into some kind of arithmetic balance, a task that has not proved too great in recent history for such non-superpowers as Canada, Bolivia, and Paraguay. The same Americans who left their guts in the grass at Gettysburg and ran face first into hot hell on the beaches at Normandy will pay any price and bear any burden except a balanced federal checkbook. That is because the main expense unbalancing the checkbook is medical entitlements, Medicare and Medicaid chief among them, and Americans would rather face Old Cloots himself than pay a doctor’s bill out of pocket. We are kind of stupid that way.

Medicare, thanks to Representative Byrnes, is Dr. Frankenstein’s version of the Aetna benefits provided to federal employees circa 1965, with a key difference: Unlike Aetna, Medicare cannot go out of business, no matter how boneheaded its financial decisions. Because enrollment in Medicare is automatic rather than voluntary, because it is funded mainly out of payroll taxes, and because its premiums are mostly symbolic, Medicare encourages beneficiaries to make maximum use of it, which drives up both overall health-care expenses and the deficit. We have managed to cut ourselves with both sides of that double-edged sword.

#page#If American fiscal matters unrelated to health care were left to run the course set by present law, the national debt would more or less stabilize on its own as tax rates rose to the levels that obtained before Pres. George W. Bush’s tax cuts and recent years’ unusually high levels of military and domestic spending reverted to their historical levels. Nobody would much like it, but it would flatten out — except for those health-care entitlements. Practically all of the growth of our national debt in the long term is accounted for by health-care spending. Even Social Security, the other unsustainable Ponzi scheme, could be kept going for a good long while with a couple of little tweaks here and there. Not so Medicare and Medicaid.

And it’s really Medicare. Medicaid is a clear and present fiscal danger, but it will be relatively easy to fix, because it is easier to take benefits away from poor people than to take them away from well-off people, and the oldsters who collect Medicare are one of the most affluent and therefore politically powerful demographic groups in the country, age and wealth going together in our society more or less as God intended. It is worth keeping in mind that, as a National Bureau of Economic Research report found, “Medicare has led to net transfers from the poor to the wealthy, as a result of relatively regressive financing mechanisms and the higher expenditures and longer survival times of wealthier beneficiaries. Even with recent financing reforms, net transfers to the wealthy are likely to continue for at least several more decades.” Thus does Grandmother pillage the poor.

Medicare, Medicaid, and Social Security are untouchables so far as Democrats are concerned, to an even greater extent than military spending is untouchable for most Republicans. But the untouchables, together with interest on the debt, will exceed 2011 revenues. If we cut 10 percent in each of the untouchables — a prospect that surely would be denounced as radical — we could balance the 2012 budget with additional cuts elsewhere, but they would be cuts of such a scale as to ensure their denunciation as even more radical. They would in fact be unprecedented: eliminating 100 percent of federal education spending, for instance, and shuttering entire cabinet departments, and more or less liquidating food stamps, housing subsidies, and the rest of the welfare state in its entirety, etc. Many conservatives would no doubt be happy to order a round of that and make it a double. It is, unfortunately, an implausible outcome.

But it is also implausible that we can raise taxes sufficiently to offset the entitlement burden, which grows onerous each year as our population grays. The economy is growing at something less than 2 percent a year, if indeed it is growing at all under the destimulating ministrations of President Obama. Entitlement spending, on the other hand, is growing at 7 to 9 percent annually. If the entitlements continue to grow at 9 percent and the economy continues to grow at 1.8 percent, Medicare and Medicaid spending will, by themselves, exceed the entire output of the U.S. economy in less than 40 years. Which means that entitlements will swallow us whole, left unchecked. Those figures are admittedly pessimistic (which is not to say unimaginable). If you want a brighter scenario, entitlement growth at a more modest 7.5 percent and economic growth closer to our recent historic average at 3.5 percent yields a situation in 40 years in which Medicare and Medicaid together account for about 30 percent of GDP, meaning that the two programs would represent more spending than does the entire federal budget today — much more, indeed, than has any federal budget since 1945, when we had bigger things on our national mind than prescription-drug co-pays.

#page#Our friends at the Congressional Budget Office put it this way in 2010: “The single greatest threat to budget stability is the growth of federal spending on health care — pushed up both by increases in the number of beneficiaries of Medicare and Medicaid (because of the aging of the population) and by growth in spending per beneficiary that outstrips growth in per capita GDP. For the nation’s fiscal situation to be sustainable in future decades, growth in such spending will have to be reduced relative to its historical trend and to CBO’s projected path. Today, outlays for Medicaid and Medicare combined (excluding offsetting receipts) equal about 5.5 percent of GDP. Under current law, spending for those two programs is expected to keep growing faster than the economy, reaching 6.6 percent of GDP by 2020 and potentially reaching 10 percent by 2035.” Which is to say, the Medicare that already is bankrupting us will be double-bankrupting us in a few short years.

The downgrade was a judgment of American public finances in general. Less discussed is the fact that it is a severe judgment of President Obama’s signature health-care bill, and particularly of its plan to control medical-entitlement spending through (what else?) a panel of bureaucrats endowed with regulatory superpowers, to be called the Independent Payment Advisory Board. Democrats have been known to scoff at proposals for entitlement reform, arguing that they’ve already hung that trophy on the lodge wall. Nobody believes them. CBO has doubts about those alleged Medicare savings. S&P sure wasn’t buying it. Notably, the gentleman who runs the numbers over at Medicare HQ doesn’t buy it, either. Richard S. Foster, the chief actuary for the Centers for Medicare and Medicaid Services, told a congressional committee that he was not confident that President Obama’s health-care legislation would in fact deliver the promised savings. He prefers the approach outlined in Rep. Paul Ryan’s Roadmap: “If there’s a way to turn around the mindset for the people who do the research and development . . . to get them to focus more on cost-reducing tech and less on cost-increasing technology — if you can do that, then one of biggest components turns to your side. . . . The Roadmap has that potential.”

Which is to say, if Americans want that AAA rating back, they should consult Paul Ryan, who has done more than anybody else in our national discourse — except, perhaps, now, for S&P — to bring to our sluggish attention the scope and the depth of the medical-entitlement spending problem. That problem, and not five minutes’ worth of political drama on Capitol Hill in August, is why the United States has been downgraded — and why we deserve the downgrade.

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