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Archive for the ‘Entitlements’ Category

When I give speeches on fiscal policy, I commonly get some variation of this question (and you can choose one of more of the options).

Isn’t our fiscal problem largely the result of the wars/intervention/Iraq/Afghanistan/Libya/Syria launched by Bush/Hillary/neocons/Blackwater/Pentagon?

I generally respond by first confessing my lack of expertise on military and foreign affairs, but then I point out that I’m not a fan of nation building (see George Will and Mark Steyn on this topic), so I tell people that I’m very sympathetic to the proposition that trillions of dollars that have been misspent on foreign adventurism this century. Not to mention the human cost of dead and wounded American soldiers.

But I then tell audiences that the Pentagon is not the reason why we’re in fiscal trouble.

Let’s look at two charts, both derived from the Office and Management and Budget’s historical data.

First, here are two pie charts based on the spreadsheet in Table 4.2, which looks at how much of the budget is consumed by different agencies and departments. For both 1962 and 2016, I added together outlays for the Department of Defense and Department of Veterans Affairs and compared that military-related spending to other major categories.

As you can see, military-related outlays used to account for more than one-half of the federal budget, but not they are less than one-fourth of total spending in Washington.

Notice, by the way, that Social Security spending now consumes a significantly larger share of the federal budget, as does spending by the Treasury Department (I assume much of that is EITC redistribution).

But the biggest change, by far, is that the Department of Health and Human Services used to account for 3 percent of federal outlays, but now eats up 28 percent of the budget. Why? Because of programs such as Medicare, Medicaid, and Obamacare.

By the way, the above numbers do not mean that the military budget has been cut.

Here’s our second chart, which is based on the spreadsheet in Table 8.2, which has the numbers for inflation-adjusted outlays for major budget categories.

As you can see, the federal government is spending more today on defense than it was back in the 1960s, even after adjusting for inflation. And outlays for “domestic discretionary” programs also have increased.

But what’s obviously driving fiscal policy is the relentless expansion of entitlements (referred to as “mandatory spending” for purposes of the Budget Enforcement Act).

And because of demographic changes and bad policy choices, outlays for entitlement are projected to become a much larger burden in the future.

So now, perhaps, you understand why I keep arguing in favor of genuine entitlement reform and why I think it’s so critical that Donald Trump reconsider his skepticism.

P.S. In addition to George Will and Mark Steyn, Barack Obama also expressed some support for a libertarian-oriented foreign policy. But only in theory, not in practice.

P.P.S. To put America’s military spending in global context, check out this pie chart.

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I’m a fiscal policy wonk, so I freely acknowledge that I sometimes look at the world through green-eyeshade-colored lenses. But I don’t think it’s an exaggeration to say that expanding entitlements,Demographic 2030 changing demographics, and increasing dependency are the main long-run threats to the American economy.

And this is why the concerns I had about a Hillary Clinton presidency aren’t that different from the concerns I have about a Donald Trump presidency.

Simply stated, he apparently doesn’t even think there’s a problem that needs to be addressed. Here’s what Trump said in an interview with the Daily Signal.

I’m not going to cut Social Security like every other Republican and I’m not going to cut Medicare or Medicaid.

Some people have told me not to get too worried about this statement because candidates make so many speeches and give so many interviews that they’re bound to make mistakes and say things they don’t really mean.

I agree that we shouldn’t get too hung up on every slip of the tongue on the campaign trail (notwithstanding this clip, for instance, Obama surely doesn’t think there are 57 states).

But the Trump people actually re-posted the Daily Signal interview on the campaign’s website, which certainly suggests (to use legal terminology) malice and forethought on the issue of entitlements.

That being said, this doesn’t mean Trump is a lost cause and that genuine entitlement reform is an impossibility.

  • First, politicians oftentimes say things they don’t mean (remember Obama’s pledge that people could keep their doctors and their health plans if Obamacare was enacted?).
  • Second, the plans to fix Social Security, Medicare, and Medicaid don’t involve any cuts. Instead, reformers are proposing changes that will slow the growth of outlays.
  • Third, if Trump is even slightly serious about pushing through his big tax cut, he’ll need to have some plan to restrain overall spending to make his agenda politically viable.

For what it’s worth, I’m particularly hopeful (or not un-hopeful, to be more accurate) that Trump will be willing to address Medicaid reform, ideally as part of an overall proposal to block-grant all means-tested programs.

One reason for my semi-optimism is that the programs is becoming even more of a mess thanks to Obamacare and plenty of governors and state legislators would gladly accept that kind of reform simply to have more control over state budget matters.

And every serious budget person in Washington understands the program must be reformed because of spiraling costs.

The Wall Street Journal has an editorial today about out-of-control Medicaid spending.

One immediate problem is ObamaCare’s expansion of Medicaid, which has seen enrollment at least twice as high as advertised. …Governors claimed not joining would leave “free money” on the table because the feds would pick up 100% of the costs of new beneficiaries. In a new report this week for the Foundation for Government Accountability, Jonathan Ingram and Nicholas Horton tracked down the original enrollment projections by actuaries in 24 states that expanded and have since disclosed at least a year of data on the results. Some 11.5 million people now belong to ObamaCare’s new class of able-bodied enrollees, or 110% higher than the projections. Analysts in California expected only 910,000 people to sign up, but instead 3.84 million have, 322% off the projections. The situation is nearly as dire in New York, where enrollment is 276% higher than expected, and Illinois, which is up 90%. This liberal state triumvirate is particularly notable because they already ran generous welfare states long before ObamaCare.

Of course, the “free money” for states is a fiscal burden for all taxpayers. It’s just that the money from taxpayers gets cycled through Washington before going to state capitals.

But it’s also worth noting that the money soon won’t be “free.”

The state spending share of new Medicaid enrollment will rise to 5% next year and then to 10% by 2020, up from 0% today. The enrollment overruns mean these states will have less to spend than they planned for every other priority, especially the least fortunate.

I suppose this is a good opportunity to recycle my video on Medicaid reform. It was filmed more than five years ago, so some of the numbers are outdated (they’re worse today!). But the policy analysis is still right on point.

Who knows, maybe Trump actually will do the right thing and (in a phrase he took from Reagan) make America great again.

Remember, none of us expected that economic freedom would expand during Bill Clinton’s presidency, so a bit of optimism isn’t totally out-of-bounds.

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The burden of government spending is already excessive. But the numbers will get worse with the passage of time if policy is left on autopilot.

The main culprits are the so-called mandatory programs. Entitlements such as Social Security, Medicare, Food Stamps, and Obamacare that automatically dispense money to various constituencies are consuming an ever-larger chunk of the economy’s output.

And if you want to be even more specific, the fastest-growing entitlement program is Medicaid, which was originally supposed to be a very small program to subsidize health care for poor people but has now metastasized into a budget-gobbling fiscal disaster. Arguably, it’s the entitlement program most in need of reform.

So how big is the problem? Enormous if you look at the numbers from the National Association of State Budget Officers.

States increased their spending in fiscal year 2015 by the biggest margin in more than 20 years, but most of the increase was thanks to huge leaps in Medicaid spending under the first full year of the Affordable Care Act (ACA). Spending increased last fiscal year, which ended on June 30 for most states, by 7.8 percent, according to new estimates from the National Association of State Budget Officers (NASBO). It’s the biggest boost since 1992 and was thanks to a 15.1 percent increase in Medicaid spending, much of that paid for via federal Medicaid funds. Illinois, Michigan, Kentucky, Nevada and Oregon saw more than 30 percent increases in federal funding because they expanded Medicaid under the ACA. But 2015 was also a year where states were putting up more of their own money again.

Here’s the chart showing which outlay categories grew the fastest.

The article points out that spending is outpacing revenue.

On average, state revenues aren’t keeping pace with spending; NASBO estimates General Fund revenues will increase by just 3.8 percent.

Though the real problem is that spending is expanding faster than the private sector, which is the opposite of what is called for by my Golden Rule.

One of the reasons Medicaid grows so fast is that the program is split between Washington and the states, which both picking up a share of the cost. This may sound reasonable, but it creates a very perverse incentive structure since politicians at both levels can vote to expand the spending burden while only having to provide part of the cost.

The National Center for Policy Analysis explains how this system produces bad decisions.

Medicaid has a horrible financing mechanism: Federal transfers to states are not based on the number of poor people, or any other reasonable calculation. Instead, they depend on the amount of its own taxpayers’ money a state spends. Traditionally, when California spent $1 on Medi-Cal, the federal government kicked in $1. …So, state politicians hike taxes and spending on their own citizens in order to get as much funding as possible from people in other states (via the feds). Hospitals and Medicaid MCOs maximize this by agreeing to a state tax on themselves, which the state uses to ratchet up the federal funding. After multiplication, the money goes right back to these providers. …Stopping this wild spending growth requires fundamental reform to Medicaid’s financing. Congressional Republicans have proposed “block grants,” whereby states would get federal Medicaid transfers based on their population of poor residents, not how much they gouge out of their own people.

But unless that kind of reform happens, the program will continue to grow and become an ever-larger fiscal burden.

Heritage Action has more details on the perverse incentives of the current system.

…the federal government promises to reimburse states for a majority of their Medicaid spending, most of which involves reimbursements to health care providers. Therefore, states collude with health care providers in the following manner: they tell providers that they will tax them (so-called “provider taxes”), bringing in more revenue to the state. The state then promises to filter that money back to those same providers in the form of higher Medicaid reimbursements. States then bill the federal government for this added cost. Because the federal government provides more than 50% of total Medicaid funding, both state governments and Medicaid providers are made better off by the arrangement, while the federal government is stuck footing a larger bill it had no part in creating.

Though I partially disagree with the assertion that the feds are blameless. After all, it was politicians in Washington who created this wretched system, including the reimbursement rules that states manipulate.

This info-graphic illustrates how the “provider fee” scam operates.

The net result of all this is a nightmare for federal taxpayers, but states also are losing out when you consider the long-run consequences. And that’s even true with the Medicaid expansions contained in Obamacare, which supposedly were going to be financed almost entirely by Uncle Sam. The Wall Street Journal reports.

…the Affordable Care Act was designed to essentially bribe states to expand their Medicaid programs: The feds offered to pay 100% of additional costs through 2016, dropping to 90% by 2020. This “free money” prompted 30 states and the District of Columbia to take the deal. Democratic activists have joined with state hospital lobbies to pressure lawmakers in the remaining 20 state capitals to follow.

But free money can be very expensive.

Consider the experience of the states that did expand Medicaid. “At least 14 states have seen new enrollments exceed their original projections, causing at least seven to increase their cost estimates for 2017,” the Associated Press reported in July. The AP says that California expected 800,000 new enrollees after the state’s 2013 Medicaid expansion, but wound up with 2.3 million. Enrollment outstripped estimates in New Mexico by 44%, Oregon by 73%, and Washington state by more than 100%. This has blown holes in state budgets. Illinois once projected that its Medicaid expansion would cost the state $573 million for 2017 through 2020. Yet 200,000 more people have enrolled than were expected, and the state has increased its estimated cost for covering each. The new price tag? About $2 billion… Enrollment overruns in Kentucky forced officials to more than double the anticipated cost of the state’s Medicaid expansion for 2017, the AP reports, to $74 million from $33 million. That figure could rise to $363 million a year by 2021. In Rhode Island, where one-quarter of the state’s population is now on Medicaid, the program consumes roughly 30% of all state spending, the Providence Journal reports. To plug this growing hole, Rhode Island has levied a 3.5% tax on insurance policies sold through the state’s ObamaCare exchange.

Interestingly, Obamacare is causing pro-big government states to dig even deeper fiscal holes.

The National Center for Policy Analysis has some remarkable data on this development.

States that expanded Medicaid tend to have per capita state spending that’s about 17 percent higher than non-expansion states. …In 2004, expansion states had median per capita tax collections (both state and local) of 19 percent more than non-expansion states. By 2012, this gap had widened with expansion states collecting 28 percent more taxes per capita than non-expansion states. Moreover, since 2008 expansion states have moved to increase taxes, while non-expansion states have reduced taxes slightly.

Unsurprisingly, the states that are making government bigger are experiencing slower growth.

In 2001 expansion states had real median income that was nearly 13 percent higher than non-expansion states. However, by 2013 this gap had narrowed to just over 9 percent. Expansion states have historically had slightly lower poverty rates, but the difference was only 1 percentage point by 2012 (12.9 percent vs. 13.9 percent). Non-expansion states, although slightly poorer, have lower unemployment than expansion states (6.7 percent versus 7.2 percent).

By the way, the decision by some states to reject Medicaid expansion is a huge – and underappreciated – victory over Obamacare.

Another point worth mentioning is that the program isn’t even a good deal for the poor according to Scott Atlas at the Hoover Institution. Here’s some of what he wrote for the Wall Street Journal.

Americans should be more worried than ever about Medicaid… The cost of the $500 billion program is expected to rise to $890 billion by 2024… Yet more spending doesn’t necessarily mean better care for beneficiaries… The expansion of Medicaid is one of the most misguided parts of ObamaCare… Some 55% of doctors in major metropolitan areas refuse to take new Medicaid patients… Medicaid enrollees who manage to see a doctor typically experience outcomes worse than those under private insurance. That means more in-hospital deaths, more complications from surgery, worse posttreatment survival rates, and longer hospital stays than similar patients with private insurance. A randomized study by the Oregon Health Study Group showed that having Medicaid did not significantly improve patients’ physical health compared with those without insurance.

The proverbial icing on this foul-tasting cake is the way the program enables staggering amounts of fraud and theft.

I’ve written about this before (including how foreigners are bilking the system). But here are some fresh details from the Wall Street Journal.

…one of our favorite political euphemisms is “improper payments.” That’s how Washington airbrushes away the taxpayer money that flows each year to someone who is not eligible, or to the right beneficiary in the wrong amount, or that disappears to fraud or federal accounting ineptitude. Now thanks to ObamaCare, improper payments are soaring. Last week the Health and Human Services Department published an “alert” warning that the improper payment rate for Medicaid in 2016 will likely hit 11.5%. That’s nearly double the 5.8% rate as recently as 2013… The 11.5% for 2016 is likely an underestimate given that HHS’s goal last year was 6.7% and instead scored 9.8%, which amounts to $29.1 billion. The dollar amount of improper payments in Medicaid was bound to rise because ObamaCare vastly opened eligibility. In 2015 enrollment climbed by 13.8% and one of five Americans are now covered by the program. …In recent audits of Medicaid in Arizona, Florida, Michigan and New Jersey, the GAO uncovered 50 dead people who recouped at least $9.6 million in benefits after they died; 47 providers who registered foreign addresses as their location of service in places such as Saudi Arabia; and $448 million bestowed on 199,000 beneficiaries with fake Social Security numbers—12,500 of which had never been issued by the Social Security Administration.

But as bad as all this sounds, it can get worse.

If HHS tries hard enough, maybe the department can match the failure rate for school lunches (15.7%) or the Earned Income Tax Credit (23.8%).

And Kevin Williamson of National Review adds some acidic observations.

…the criminal — and I do not use the word figuratively — administration of Medicaid by the Obama administration. …improper payments under Medicaid have become so common that they will account this year for almost 12 percent of total Medicaid spending — just shy of $140 billion. …That rate has doubled in only a few years…12 percent in improper payments isn’t an error rate — it’s a malfeasance rate. …If improper and illegal federal payments were an economy of their own, that economy would be bigger than Hungary’s… The Obama administration is not lifting a pinky to do anything about this, even though analysts such as John Hood have — for years — been arguing that it is necessary and possible to reform this mess. As the Wall Street Journal has reported, we don’t even verify that doctors billing Medicaid for services rendered are actually doctors. In many cases, we do not do much to verify that their patients actually, you know, exist. We’ve paid untold billions of dollars to “clinics” that turn out to be little more — or nothing more — than post-office boxes and prepaid cell phones. And as bad as that 12 percent rate is, some policy scholars believe that it is in fact probably worse.

Kevin observes that this system is good for the Poverty Pimps.

…the real problem with the welfare state is not the poor people receiving checks — it’s everybody in the middle, the vast array of government employees, their union allies, contractors, and third parties who earn six-, seven-, eight-, or nine-figure paydays taking their cuts of money we think we’re spending on the poor. This is an enormous criminal conspiracy against the American people and the public fisc.

You might think that fixing this fraud would be an area for bipartisan cooperation.

But the sad reality is that fraud is a feature, not a bug. Politicians like the fact that scam artists in their states and district are stealing healthcare money from taxpayers. After all, recipients of the loot can be registered voters and campaign contributors.

So what’s the best way of fixing this mess?

Will big tax hikes solve the problems? If the problem is that America isn’t enough like France, then the answer is yes.

But if the problem is that government already is too much of a burden and that it would be a good idea to at least slow down the rate at which America becomes France, then the answer is genuine entitlement reform.

And this video shows how the Medicaid program should be “block-granted” (just as welfare was reformed in the 1990s).

P.S. For all intents and purposes, block granting Medicaid is a partial repeal of Obamacare. Just in case you wanted an additional reason to support reform.

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I’ve been accused of making supposedly inconsistent arguments against Hillary Clinton. Make up your mind, these critics say. Is she corrupt or is she a doctrinaire leftist?

I always respond with the simple observation that she’s both. Not that this should come as a surprise. Proponents of bigger government have long track records of expanding their bank accounts at the same time they’re expanding the burden of the public sector. This is true for radical leftists in places like Venezuela and it’s true for establishment leftists in places like America.

And it’s definitely true for Hillary Clinton. I shared lots of information about Hillary’s corruption yesterday, so let’s spend some time today detailing her statist policy agenda.

Consider her new entitlement scheme for childcare. As the Wall Street Journal opines, it’s even worse than an ordinary handout.

Hillary Clinton is methodically expanding her plans to supervise or subsidize those remaining spheres of human existence unspoiled by government. Mrs. Clinton rolled out her latest proposal…to make child care more affordable for working parents and also to raise the wages of child-care workers. The Democrat didn’t mention how she’d resolve the contradiction between her cost-increasing ideas and her cost-reducing ideas, though you can bet it will be expensive. …Her solution is for the feds to cap the share of a family’s income that goes toward care at 10%, with the rest of the tab covered by various tax benefits, direct cash payments and scholarships.

Her scheme to cap a family’s exposure so they don’t have to pay more than 10 percent may be appealing to some voters, but it is terrible economics.

Although we don’t have details on how the various handouts will work, the net effect surely will be to exacerbate a third-party payer problem that already is leading to childcare costs rising faster than the overall inflation rate.

After all, families won’t care about the cost once it rises above 10 percent of their income since Hillary says that taxpayers will pick up the tab for anything about that level.

There’s more information about government intervention in the editorial.

The auditors at the Government Accountability Office report that there are currently 45 federal programs dedicated to supporting care “from birth through age five,” spread across multiple agencies. The Agriculture Department runs a nursery division, for some reason. …Mrs. Clinton also feels that caregivers are paid “less than the value of their worth,” and she promises to increase their compensation. How? Why, another program of course. She’ll call it the Respect and Increased Salaries for Early Childhood Educators (Raise) Initiative, which she says is modelled after another one of her proposals, the Care Workers Initiative. …If families think day care and health care are “really expensive” now, wait until they have to pay for Mrs. Clinton’s government.

Just as subsidized childcare will be very expensive if Hillary gets elected, the same will be true for higher education.

But in a different way. The current system of subsidies and handouts gives money (in the form of grants and loans) to students, who then give the money to colleges and universities. This is a great deal for the schools, who have taken advantage of the programs by dramatically increasing tuition and fees, while also expanding bureaucratic empires.

Hillary’s plan will expand the subsidies for colleges and universities, but students apparently no longer will serve as the middlemen. Instead, the money will go directly from Uncle Sam to the schools.

Here’s some analysis from the Pope Center on Hillary’s new scheme.

Clinton has come out with a plan to make public colleges and universities free for families with earnings less than $125,000 annually by 2021. …“free” college…would depend on state governments going along with her scheme whereby the federal government would pay them if they cooperate by charging no tuition… Suppose a state decides to adopt Clinton’s free college plan. What would the consequences be? …That would mean at least a modest increase in enrollment, but it would come mainly from the most academically marginal students. The colleges and universities that gained in those enrollments would also find they need to increase remedial programs. …Another adverse result from making college tuition free would be that many students would devote less effort to their courses. …Federal Reserve Bank of New York economist Aysegul Sahin…studied the effort college students put into their work in a 2004 paper“The Incentive Effects of Higher Education Subsidies on Student Effort.” She concluded, “Low-tuition, high-subsidy policies cause an increase in the ratio of less highly-motivated students among the college graduates and that even highly-motivated ones respond to lower tuition by choosing to study less.”

As with much of Hillary’s agenda, we don’t have full details. I strongly suspect that colleges and universities will have a big incentive to jack up tuition and fees to take advantage of the new handout, though I suppose we have to consider the possibility (fantasy?) that the plan will somehow include safeguards to prevent that from happening.

Oh, and don’t forget all the tax hikes she’s proposing to finance bigger government.

The really sad part about all this is that her husband actually wound up being one of the most market-oriented presidents in the post-World War II era. I’ve written on this topic several times (including speculation on whether the credit actually belongs to the post-1994 GOP Congress).

Is it possible that Hillary decides to “triangulate” and move to the center if she gets to the White House?

Yes, but I’m not brimming with optimism.

The Wall Street Journal has some depressing analysis on Bill Clinton vs Hillary Clinton.

…the Obama-era Democratic Party has repudiated the Democratic Party’s Bill-era centrist agenda. They now call themselves progressives, not New Democrats… The Clinton contradiction is that she claims she’ll produce economic results like her husband did with economic policies like Mr. Obama’s.

The editorial looks at Bill Clinton’s sensible record and compares it to what Hillary is proposing.

His wife wants to nearly double the top tax rate on long-term cap gains to 43.4% from 23.8%, in the name of ending “quarterly capitalism.” That’s higher than the 40% rate under Jimmy Carter, and she’d also impose a minimum tax on millionaires and above, details to come. …Mrs. Clinton has repudiated the Trans-Pacific Trade Partnership that she had praised as Secretary of State. …She wants to extend Dodd-Frank regulation to nonbanks, and she promises to entrench Mr. Obama’s anticarbon central planning at the EPA and expand ObamaCare with price controls on new medicines. …Mrs. Clinton is proposing to impose many more such work disincentives. She’ll bestow tax credits on everything from child care to elderly care, from college tuition to businesses that share profits with workers. To the extent her new mandates for family leave, the minimum wage, overtime and “equal pay” increase the cost of labor, she’ll drive more Americans out of the workforce. Oh, and…Mrs. Clinton wants to “enhance” Social Security benefits and make Medicare available to pre-retirees.

I’ve already written about her irresponsible approach to Social Security.

And I also opined on the issue in this interview.

The bottom line is that we’re in a very deep hole and Hillary Clinton, simply for reasons of personal ambition, wants to dig the hole deeper. As I remarked in the interview, she’s akin to a Greek politician agitating for more spending in 2007.

Given all this, is anyone surprised that “French President Francois Hollande endorsed Hillary Clinton”? What’s next, a pro-Hillary campaign commercial featuring Nicolas Maduro? A direct mail piece from the ghost of Che Guevara?

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I’m like a broken record when it comes to entitlement spending. I’ve explained, ad nauseam, that programs such as Medicare, Medicaid, Obamacare, and Social Security must be reformed.

In part, genuine entitlement reform is a good idea because you get better economic performance when you replace tax-and-transfer schemes with private savings and competitive markets.

Demographic 2030But reform also is desperately needed because of changing demographics. Simply stated, leaving all the entitlement programs on autopilot is a recipe for a Greek-style fiscal crisis.

If you want a rigorous explanation of the issue, my colleague Jeff Miron has a must-read monograph on the topic. You should peruse the entire study, but here’s the key conclusion if you’re pressed for time.

…this paper projects fiscal imbalance as of every year between 1965 and 2014, using data-supported assumptions about gross domestic product (GDP) growth, revenue, and trends in mandatory spending on Social Security, Medicare, Medicaid, and other programs. The projections reveal that the United States has faced a growing fiscal imbalance since the early 1970s, largely as a consequence of continuous growth in mandatory spending. As of 2014, the fiscal imbalance stands at $117.9 trillion, with few signs of future improvement even if GDP growth accelerates or tax revenues increase relative to historic norms. Thus the only viable way to restore fiscal balance is to scale back mandatory spending policies, particularly on large health care programs such as Medicare, Medicaid, and the Affordable Care Act (ACA).

Jeff’s report is filled with sobering charts. I’ve picked out three that deserve special attention.

First, here’s a look back in history at the growing fiscal burden of entitlement programs.

Second, here’s a look forward at how the fiscal burden of entitlement programs will get even worse in coming decades.

Keep in mind, by the way, that the two above charts only show the fiscal burden of entitlement programs (sometimes referred to as “mandatory spending” since the laws “mandate” that money be given to anyone who is “entitled” based on various criteria).

When you add discretionary (annually appropriated) spending to the mix, as well as interest that is paid on the national debt, the numbers get even more grim.

Jeff adds everything together and shows, for each year between 1965 and 2014, the “present value” of the gap between what the government is promising to spend and how much revenue it is projected to collect.

These numbers are especially horrific because “present value” is a measure of how much money the government would have to somehow obtain and set aside in order to have a nest egg capable of offsetting future deficits.

Needless to say, the federal government did not have access to $118 trillion (yes, trillion with a “t”) in 2014. And if there were updated numbers for 2015 and 2016 (which would probably be even higher than $118 trillion), the federal government still wouldn’t have access to that amount of money either.

Especially since the total annual output of the American economy is about $18 trillion.

So now you can understand why international bureaucracies like the IMF, BIS, and OECD estimate that the fiscal challenge in the United States may be even bigger than the problems in decrepit welfare states such as France and Italy.

Let’s get another perspective on the issue. James Capretta of the Ethics and Public Policy Center warns about the scope of the problem.

Despite what presidential candidates Donald Trump and Hillary Clinton have been saying on the campaign trail, the need to reform the nation’s major entitlement programs cannot be wished away. The primary cause of the nation’s fiscal problems, now and in the future, is the rapid rise in entitlement spending. In 1970, spending on Social Security and the major health care entitlement programs was 3.6 percent of GDP. In 2015, spending on these programs was 10.3 percent of GDP. By 2040, CBO expects spending on these programs to reach 14.2 percent of GDP. …entitlement reform is needed to put the federal government’s finances on a more stable foundation.

He outlines his preferred reforms, some of which I heartily embrace and some of what I think are too timid, but the key point is that he succinctly explains the need to act soon to avoid a giant long-term problem.

…reforms are not intended to create budgetary balance in the short-run. Large-scale change cannot be implemented in the major programs without significant transition periods, which means the reforms need to be enacted soon to reduce costs in fifteen, twenty, and twenty-five years. Skeptics may say it’s pointless to worry about fiscal problems that are more than twenty years off. They’re wrong. …The result is a misallocation of resources that undermines long-term economic growth. …Entitlement reform is an absolute necessity, as will soon become evident to everyone, one way or another.

The recent testimony by Nicholas Eberstadt of the American Enterprise Institute also is must reading.

In just two generations, the government…has effectively become an entitlements machine. …transfers have become a major component in the family budget of the average American household-and our dependence on these government transfers continues to rise. …Fifty years into our great social experiment of massive expansion of entitlement programs, there is ample evidence to indicate that the unintended consequences of this reconfigutation of American political and economic life have been major and adverse.

You should read the entire testimony, which is a comprehensive explanation of how entitlements are eroding American exceptionalism.

And I’ve previously shared some of Eberstadt’s work on the growing dependency crisis in America.

In effect, our “social capital” of self reliance and the work ethic is being replaced by an entitlement mentality.

At the risk of understatement, that won’t end well. Heck, I don’t know which part is more depressing, the ever-growing burden of spending or the fact that more and more Americans think it’s okay to live off the labor of others.

All I can say for sure is that this combination never was, is not now, and never will be a recipe for national success.

Let’s conclude with some sage observations by George Melloan of the Wall Street Journal. He summarizes the problem as being a combination of too much spending and too little political courage. Here’s the too-much-spending part.

…we seem richer than we actually are because we have borrowed so heavily from future generations. …the nation’s slow growth and rising debt are already reducing the opportunities for upward mobility. …Recent projections of the future cost of current government obligations certainly won’t relieve…people’s worries. Those promises have expanded far beyond any reasonable projection of the government’s ability to extract enough revenue to cover them. …The Congressional Budget Office projects a steady rise in “mandatory” (i.e., entitlement) costs as a share of GDP out into the distant future. …The upshot: Americans are deep in debt, mainly thanks to government excesses.

And here’s the too-little-political-courage part.

The only real answer is that the entitlement programs will have to be reformed, and sooner better than later, because the longer reform is postponed the greater the fiscal imbalance will become and the greater its drain will be… Donald Trump is out to lunch on this issue, as he is on most questions that require more than a fatuous sound-bite answer. As for Hillary…, forget about it.

Sigh, how depressing. It seems like America will be “Europeanized.”

For additional background on the issue of debt, unfunded liabilities, and present value, this video is a great tutorial.

P.S. I must have taken LSD or crack earlier this year. That’s the only logical explanation for saying I was optimistic about entitlement reform.

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The Social Security Administration has released the 2016 Trustees Report, which shines a spotlight on the overall fiscal condition of the program.

In previous years (2012, 2013, 2014), I’ve used this opportunity to play Paul Revere. But instead of warning that the British are coming, I sound the alarm about a future fiscal crisis resulting from demographic change and poorly designed entitlement programs.

Which is what I did in this interview on Fox Business.

It wasn’t a long interview, but I had the opportunity to touch on four very important issues.

First, I explained that the Social Security Trust Fund is nothing but a pile of IOUs. It’s money the government owes itself, which means that the bonds in the Trust Fund can only be turned into real money by taking more from the private sector.

But if you don’t trust me, perhaps you’ll believe the Clinton Administration, which admitted back in 1999 (see page 337) that the Trust Fund is just a bookkeeping gimmick.

These balances are available to finance future benefit payments and other trust fund expenditures–but only in a bookkeeping sense. …They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.

In other words, the Trust Fund is like putting IOUs to yourself in a college fund. When it’s time for junior to start his freshman year, you’ll have to find the money to cash those IOUs.

Second, Social Security already is in the red and the rising burden of spending for the program will lead to huge fiscal shortfalls.

Here’s a chart, based directly on the data from Table VI.G9 of the Trustees Report, showing the annual deficit in the program based on today’s dollars.

Third, it’s grossly irresponsible for politicians such as Elizabeth Warren and Hillary Clinton to agitate for higher spending in the program.

Andrew Biggs of the American Enterprise Institute weighed in on this issue earlier this year. Here’s some of what he wrote in a column for the Wall Street Journal.

Mrs. Clinton would raise retirement payments for widows as well as provide Social Security credits for individuals who take time out of the workforce to care for a child or an infirm adult.

Andrew points out that Hillary also has expressed support for increases in the payroll tax rate and letting the government impose the tax on a greater share of income.

Mrs. Clinton…has recently spoken in favor of both approaches.

By the way, the latter option is especially dangerous for the economy, as explained in this video.

Fourth, Social Security is in bad shape, but the main long-run entitlement challenge comes from health-related programs such as Medicare, Medicaid, and Obamacare.

In other words, we need comprehensive long-run entitlement reform if we don’t want to become Greece.

P.S. For reasons that I’ve already covered, I didn’t like being called a “deficit hawk” by the host.

P.P.S. While proponents deserve credit for being serious, I think the Simpson-Bowles plan leaves a lot to be desired.

P.P.P.S. Here’s the right way to fix Social Security.

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Changing demographics is one of the most powerful arguments for genuine entitlement reform.

When programs such as Social Security and Medicare (and equivalent systems in other nations) were first created, there were lots of young people and comparatively few old people.

And so long as a “population pyramid” was the norm, reasonably sized welfare states were sustainable (though still not desirable because of the impact on labor supply, savings rates, tax policy, etc).

In most parts of the world, however, demographic profiles have changed. Because of longer life expectancy and falling birth rates, population pyramids are turning into population cylinders.

This is one of the reasons why there is a fiscal crisis in Southern European nations such as Greece. And there’s little reason for optimism since the budgetary outlook will get worse in those countries as their versions of baby-boom generations move into full retirement.

But while Southern Europe already has been hit, and while the long-run challenge in Northern European nations such as France has received a lot of attention, there’s been inadequate focus on the problem in Eastern Europe.

The fact that there’s a major problem surprises some people. After all, isn’t the welfare state smaller in these countries? Haven’t many of them adopted pro-growth reforms such as the flat tax? Isn’t Eastern Europe a success story considering that the region was enslaved by communism for many decades?

To some degree, the answer to those questions is yes. But there are two big challenges for the region.

First, while the fiscal burden of government may not be as high in some Eastern European countries as it is elsewhere on the continent (damning with faint praise), those nations tend to rank lower for other factors that determine overall economic freedom, such as regulation and the rule of law.

Looking at the most-recent edition of Economic Freedom of the World, there are nine Western European nations among the top 30 countries: Switzerland (#4), Ireland (#8), United Kingdom (#10), Finland (#19), Denmark (#22), Luxembourg (#27), Norway (#27), Germany (#29), and the Netherlands (#30).

For Eastern Europe, by contrast, the only representatives are Romania (#17), Lithuania (#19), and Estonia (#22).

Second, Eastern Europe has a giant demographic challenge.

Here’s what was recently reported by the Financial Times.

Eastern Europe’s population is shrinking like no other regional population in modern history. …a population drop throughout a whole region and over decades has never been observed in the world since the 1950s with the exception of…Eastern Europe over the last 25 consecutive years.

Here’s the chart that accompanied the article. It shows the population change over five-year periods, starting in 1955. Eastern Europe (circled in the lower right) is suffering a population hemorrhage.

By the way, it’s not like the trend is about to change.

If you look at global fertility data, these nations all rank near the bottom. And they also suffer from brain drain since a very smart person, even from fast-growing, low-tax Estonia, generally can enjoy more after-tax income by moving to an already-rich nation such as Switzerland or the United Kingdom.

So what’s the moral of the story? What lessons can be learned?

There are actually three answers, only two of which are practical.

  • First, Eastern European nations can somehow boost birthrates. But nobody knows how to coerce or bribe people to have more children.
  • Second, Eastern European nations can engage in more reform to improve overall economic liberty and thus boost growth rates.
  • Third, Eastern European nations can copy Hong Kong and Singapore (both very near the bottom for fertility) by setting up private retirement systems.

The second option obviously is good, and presumably would reduce – and perhaps ultimately reverse – the brain drain.

But the third option is the one that’s absolutely required.

The good news is that there’s been some movement in that direction. But the bad news is that reform has taken place only in some nations, and usually only partial privatization, and in some cases (like Poland and Hungary) the reforms have been reversed.

And even if full pension reform is adopted, there’s still the harder-to-solve issue of government-run healthcare.

Eastern Europe has a very grim future.

P.S. I’m a great fan of the reforms that have been adopted in some of the nations in Eastern Europe, but none of them are small-government jurisdictions. Yes, the welfare state in Eastern European countries is generally smaller than in Western European nations, but it’s worth noting that every Eastern European nation in the OECD (Czech Republic, Estonia, Hungary, Poland, Slovakia, and Slovenia) has a larger burden of government spending than the United States.

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