The Case for Entitlement Reform, Part II

I periodically explain why and how to fix entitlements.

Here’s my latest attempt, as part of a conversation with David McIntosh of the Club for Growth.

A few months ago, I shared some alarming CBO data about the ever-growing burden of  government.

But rather than regurgitate that data, let’s look at the most-recent Financial Report of the United States Government, published each year by the Treasury Department.

There are dozens of tables and graphs in the report, but this excerpt from the executive summary captures the magnitude of America’s fiscal challenge.

At the risk of understatement, $79 trillion is a lot of money.

That number should be scary, but it’s probably not scary enough, because “PV” refers to “present value.”

So what the report is really saying is that we would need to set aside an extra $79 trillion of revenue today to cover the entitlement promises of politicians over the next 75 years.

And that’s far more than twice the size of the entire economy.

This is why I keep pointing out there we face an unavoidable choice of doing something good (entitlement reform) or doing something bad (massive tax increases).

By the way, the report also contains this table, which basically shows the cost of kicking the can down the road.

It shows that the Biden-Trump policy will increase future pain.

Do they not care because they are very old? Do they not care because of “public choice.” Do they not care because of limited cognitive ability?

I don’t know. But I know that both Trump and Biden are doing something that will cause America to become a European-style welfare state. And that won’t be good for national prosperity.

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Donald Trump Supports Massive Tax Increases on Middle-Class Americans, Part I

Copying some self-styled national conservatives, Donald Trump this week endorsed major tax increases on lower-income and middle-class Americans.

But he embraced huge tax increases in an indirect fashion.

• He did not say “let’s adopt money-siphoning value-added taxes” like they have in Europe.
• Nor did he say “let’s impose very high income tax rates on ordinary people” like they do in Europe.
• And he didn’t say “let’s have much higher payroll tax rates” like they have in Europe.

Instead, Trump embraced huge tax increases by default. He told congressional Republicans to ignore America’s slow-motion crisis of entitlement spending.

For all intents and purposes, that is the same as embracing huge tax increases.

To be more specific, if you endorse European-style government spending, you are necessarily and unavoidably endorsing European-style tax policy.

And that’s what Trump did. Here are some excerpts from a report in the Hill by Brett Samuels.

Former President Trump on Friday urged Republicans in Congress not to cut “a single penny” from Medicare or Social Security… “Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security…,” Trump said in a recorded video statement posted to Truth Social. …The former president’s message about protecting Social Security and Medicare is consistent with his previous comments on the issue as a candidate in 2016.

For what it’s worth, I’m not surprised at what Trump said.

He favored big government as a candidate in 2016 and he expanded the burden of spending when he was President.

But some of us don’t want to surrender and doom the United States to European-style economic stagnation.

Which is why I’ve decided to take a sentence I wrote last month and turn it into the 15th Theorem of Government.

Here’s the bottom line: Genuine patriots recognize America has a problem and they have the courage to advocate reforms that will actually solve the problem.

It will be interesting to see how many Republicans fit that definition.

P.S. I’m not a never-Trumper or anti-Trumper. For instance, I praised his tax policy and said nice things about his record on regulation. But I’m loyal to ideas, not to people, so I don’t hesitate to criticize any politician who pushes ideas that are bad for America.

P.P.S. Here are the other 14 Theorems of Government.

• The “First Theorem” explains how Washington really operates.
• The “Second Theorem” explains why it is so important to block the creation of new programs.
• The “Third Theorem” explains why centralized programs inevitably waste money.
• The “Fourth Theorem” explains that good policy can be good politics.
• The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
• The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
• The “Seventh Theorem” explains how bigger governments are less competent.
• The “Eighth Theorem” explains the motives of those who focus on inequality.
• The “Ninth Theorem” explains how politics often trumps principles.
• The “Tenth Theorem” explains how politicians manufacture/exploit crises.
• The “Eleventh Theorem” explains why big business is often anti-free market.
• The “Twelfth Theorem” explains you can’t have European-sized government without pillaging the middle class.
• The “Thirteenth Theorem” explains that people are unwilling to pay for bloated government.
• The “Fourteenth Theorem” explains how poor people are hurt by big government.

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America’s Looming Entitlement Crisis

Back in July, I made the case for the right kind of entitlement reform in a discussion with the folks at Live and Let Live.

Today, I want to underscore why it is important to focus on “the right kind” of reform.

On paper, you can save money with “means testing” of benefits, but that creates an indirect penalty on work, saving, and investment.

You can also, on paper, save money by imposing price controls on health care, but that policy has a long track record of failure.

At the risk of understatement, either of those approaches represents “the wrong kind” of entitlement reform. Indeed, those policies are not really reform. Instead, they are tinkering with systems that are fundamentally broken.

For what it is worth, most politicians do not support good reform or bad reform.

As predicted by “public choice,” their preferred approach is kicking the can down the road.

Which is what Greek politicians did for many years.

But they learned in Greece that ignoring a problem does not make it disappear. Instead, it is a recipe for fiscal crisis (and we will probably have to re-learn that lesson in Italy).

So my other goal today is to show why something needs to be done.

We’ll start with a look at Medicare from Brian Riedl’s chartbook.

That’s a very sobering image, so now I’ll share some very sobering words.

James Capretta of the American Enterprise Institute summarizes America’s grim fiscal future.

In 2001, the Treasury estimated the government’s net unfunded liabilities, in present value terms, at $6.5 trillion, or 61 percent of GDP, with federal debt accounting for $3.3 trillion of the measured obligations. …By 2021, the government’s net position had deteriorated to minus $29.9 trillion, or 128 percent of GDP, with federal debt accounting for $22.3 trillion of the liabilities. The government’s unfunded commitments beyond public debt had grown by $2.9 trillion over ten years. …The financial hole is actually deeper than these numbers reveal because they exclude the dramatic effects of Social Security and Medicare. …with Social Security and Medicare included in the assessment, the federal government’s unfunded liabilities in 2021 are $93.1 trillion, or nearly 400 percent of annual GDP. That compares with $11.1 trillion as calculated in the 2001 Treasury report, which was 105 percent of GDP. …The problem posed by unfunded public liabilities is a relatively new one in U.S. history. It has only been over the past half century that the combination of an aging population and the modern entitlement system has pushed the federal government toward a financial crisis.

Having shared all this depressing data, I’ll now close with a couple of observations.

• First, doing nothing almost surely guarantees massive future tax increases. Including European-style levies like a value-added tax that will be very bad news for lower- income and middle-class taxpayers.
• Second, “funded liabilities” are hardly an improvement over “unfunded liabilities” since that simply means debt-financed spending becomes tax-financed spending. From the frying pan to the fire, or vice-versa.

As I said in the above video, we need the right kind of entitlement reform so that we save money and have better policy for old people and poor people.

P.S. Entitlements are a ubiquitous problem in developed nations.

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The Case for Entitlement Reform, Part I

If Joe Biden’s bungled economic policy is any indication, the GOP may wind up controlling Washington in the not-too-distant future.

If so, I hope Republicans rekindle their interest in the kind of genuine entitlement reform discussed in this interview.

But I’m not sure whether to be optimistic or pessimistic.

On the plus side, the GOP supported pro-growth entitlement reform during the Obama years.

On the minus side, the party largely punted on the issue once Trump took over.

To be sure, punting is the easy route from a “public choice” perspective. Politicians like offering freebies to voters and many voters like getting handouts.

However, that approach means America’s economy is weakened by an ever-growing burden of federal spending and eventually is plunged into fiscal crisis.

And that’s based on the programs that already exist. Joe Biden wants to expand the welfare state with even more entitlements!

The Wall Street Journal editorialized about the downside of making America more like Europe last October.

The result of…expanded entitlements is likely to be reduced incentives to work and invest, slower economic growth, lower living standards, and less fiscal space for essential public goods like national defense. That’s the lesson from Europe’s cradle-to-grave welfare states… Europe’s little-discussed secret is that its cradle-to-grave welfare states are financed by the middle class via value-added and payroll taxes. The combined employer-employee social security tax rate is 36% in Spain, 40% in Italy and 65% in France. Value-added taxes in most European economies are around 20%. There simply aren’t enough rich to finance their entitlements.

Amen. I’ve repeatedly warned that a European-sized welfare state would mean European-sized taxes on lower-income and middle-class Americans.

And what’s remarkable (and discouraging) is that some politicians in the U.S. want to expand entitlements even though many European governments now realize they made big mistakes and need to scale back.

The irony is that some European governments have tried to reform their tax and welfare systems to become more competitive. Germany and Sweden over two decades reformed their welfare and labor policies. …Other European governments are also pushing welfare-state reforms. French President Emmanuel Macron has passed pension reform and cut the corporate tax rate to 26.5% from 33% in 2017… Greece is pulling out of its debt trap with Prime Minister Kyriakos Mitsotakis’s tax, pension and regulatory reforms.

For what it’s worth, I’m happy about these reforms, but I fear many European nations are in the too-little-too-late category.

Why? Because the demographic outlook is deteriorating faster than reform is happening. In other words, most of them are probably destined to suffer Greek-style fiscal crises.

But if (or when) that happens, maybe American politicians will finally wake up and realize we need good reforms to prevent Social Security, Medicare, and Medicaid from causing a similar collapse on this side of the Atlantic Ocean..

Hopefully that epiphany will take place before it is too late for the United States.

P.S. For those who are interested in the history of fiscal policy, John Cogan of the Hoover Institution wrote about pre-20th-century entitlements earlier this year.

Here are excerpts from his column in the Wall Street Journal.

The history of U.S. entitlements is a 230-year record of continuous expansion… The first major entitlement, Revolutionary War disability benefits, was initially restricted to members of the Continental Army and Navy who were injured in battle and survivors of those killed in wartime. Eligibility was then expanded, first to state militia soldiers, then to veterans whose disabilities were unrelated to wartime service, and eventually to virtually all people who served during the war regardless of disability. Civil War disability pensions followed the same…process, except on a far grander scale. Pensions were initially confined to U.S servicemen who suffered wartime injuries and survivors of those killed in battle. Eventually they were extended to virtually all union Civil War veterans regardless of disability. …Congress followed the same liberalizing process with 20th-century entitlements.

If this excerpt doesn’t satisfy your curiosity, here’s Cogan discussing the topic for 46 minutes.

P.P.S. Not all entitlement reform is created equal.

P.P.P.S. Here an informative chart if you want to know whether to blame defense spending or entitlement spending.

P.P.P.P.S. I always argue in favor of a Swiss-style spending cap, which presumably would force politicians to address America’s entitlement problem.

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Time to Surrender on Entitlement Reform?

Back in 2015, just five years ago, it seemed like entitlement reform might happen.

Republicans in the House and Senate voted for budgets based on much-needed changes to Medicare and Medicaid. That was only a symbolic step with Obama in the White House, to be sure, but the presumption was that actual reform would be possible if Republicans controlled both the White House and Congress after the 2016 election.

The good news is that the GOP did wind up in control of Washington.

The bad news is that Donald Trump was in the White House.

Given his unfortunate views on government spending, that killed entitlement reform for the past four years.

And now Biden will be in the White House, and he wants to expand those programs, so that presumably kills reform for the next four years.

But does that change the fact that the programs should be reformed?

In a column for National Review, Fred Bauer asserts that Republicans should give up on trying to control big government.

Republicans…risk being lured toward a pivot back to 2010s-style austerity politics during the Biden administration, with a renewed focus on the federal deficit and entitlement reform. …Trying to push party-line entitlement reform has backfired on the GOP again and again in the recent past. George W. Bush’s 2005 Social Security–privatization proposal kneecapped his second term from the start. In 2012, Republicans got bogged down defending their position on Medicare reform… retreating to austerity politics could cost Republicans a chance to promote other kinds of reforms that would strengthen workers and families: fixing the medical marketplace (by reducing cartelization, revising medical licensing, etc.), passing a 21st-century infrastructure program, trying to secure a strategic industrial base, enacting smarter regulation of Big Tech that addresses market concerns and serves the public welfare, offering Americans family tax credits, and so on.

Also writing for National Review, Yuval Levin of the American Enterprise Institute explains that we have no choice but to grapple with entitlements.

The Republican Party has styled itself the party of fiscal restraint for the better part of a century… But there hasn’t been much action, or much willingness to expend political capital or make some painful deals to achieve a meaningful change in the trajectory of the government’s finances. …the willful blindness of the Trump era…means the underlying fiscal problems have grown worse… the costs of fiscal irresponsibility have more to do with constraints on future growth… Fiscal reform will need to involve changes to these programs.

Levin even suggests that entitlement reform is so important that it might be worth ceding ground in other areas.

Repub­licans should be willing to make bargains that involve leaving discretionary spending untouched, or even on a path of modest growth, if that allows for some reforms of entitlements. They should also be willing to contemplate tax increases and reforms that move the burden of federal revenue upward on the income scale, provided such changes do not unduly undermine growth.

My two cents is that Levin is right and Bauer is wrong.

To be sure, I don’t agree with everything Levin wrote (it’s theoretically possible to make a tax increase acceptable, for instance, but that won’t happen in the real world). But at least he recognizes the long-run spending outlook is so dour that entitlement reform is absolutely necessary.

Bauer, by contrast, argues that we should throw in the towel because reform is politically difficult.

I think he misreads the evidence.

Regarding Social Security, Bush got elected twice while supporting personal accounts, but the issue never went anywhere in his second term in large part because the White House never proposed a plan. Moreover, the public continued to be supportive of the idea of personal accounts, even after Bush left office.

Likewise, I think Bauer is wrong on Medicare and Medicaid. Republicans easily maintained control of the House in 2012, 2014 and 2016, notwithstanding Democratic attacks that they wanted to “push granny off a cliff.” And they still control the Senate after years of similar attacks.

But even if Bauer was right about the politics, he’s wrong about policy.

America will become another Greece if we don’t reform entitlements. That will be bad for the nation. It will be bad for our economy. It will be bad for our children and grandchildren. It will be bad for the fabric of our society.

The bottom line is that entitlement reform is the patriotic thing to do.

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Everything You Need to Know about America’s Future Entitlement Crisis

Before our depressing discussion today about the fiscal impact of entitlement programs (Social Security, Medicare, Medicaid, EITC, Food Stamps, welfare, and Obamacare, etc), here’s a video of how it all began.

I think this is a great introduction to the issue, particularly since you learn how “public choice” (i.e., politicians engaging in self-serving behavior) played a key role in the development of today’s welfare state.

But if you don’t have the time to watch a long video, here are four key things to understand.

1. Entitlements (budget geeks sometimes use the term “mandatory spending”) are programs that automatically give people money if they meet certain requirements (such as reaching a certain age or having income below a certain level).
2. Since these programs automatically give people money, they are not part of the annual appropriations process (the “discretionary spending” parts of the budget that are determined on a yearly basis).
3. Some entitlement programs are “means tested” and designed to funnel money to low-income individuals. This type of spending is sometimes referred to as “unearned benefits.”
4. Some entitlement programs are “social insurance” since people pay specific tax in exchange for specific benefits. This type of spending is sometimes referred to as “earned benefits” (though in many cases recipient receive much more than they paid).

By the way, there’s one additional thing to understand.

Indeed, it may be the most important thing to understand if you care about America’s fiscal and economic future.

5.  Entitlement programs are a slow-motion fiscal train wreck.

Let’s look at a new study authored by James Capretta of the America Enterprise Institute. He also has some sobering observations on the history of entitlement programs.

The growing expense of entitlement programs has occurred steadily for more than a half century and is reflected in the shifting distribution of federal spending activity. …by the early 1960s, two-thirds of all spending continued to require approval by the House and Senate appropriations committees each year, and less than a third was spent on entitlement programs. … By 2019, nearly two-thirds of all spending in the budget was for entitlement programs, and less than a third went to annually appropriated accounts.

If you prefer this information visually, here are a couple of pie charts from the study.

While there are dozens of entitlement programs, the big three are Social Security, Medicare, and Medicaid.

The largest entitlement programs are Social Security, Medicare, and Medicaid. Together, they now make up nearly half of all federal spending. Their combined growth over the past half century is the primary source of intensifying fiscal pressure. …In 2019, combined federal spending on them was 9.8 percent of GDP, up from 3.7 percent in 1970. CBO expects them to cost 17.2 percent of GDP in 2050, which is almost equal to the average annual revenue collected by the federal government from 1970 to 2019.

And here’s how they’ve been consuming ever-larger shares of America’s economic output.

What’s driving this ever-increasing fiscal burden?

In part, it’s because we have more and more old people and they are living longer.

So what does all this mean?

Capretta points out that uncontrolled entitlement spending may lead to a debt crisis.

I don’t disagree, but I think that’s a secondary concern. The real problem is that government spending will become an ever-larger economic burden. And that will hinder growth whether it’s financed by borrowing or taxes.

Speaking of taxes, here’s the chart from the study that deserves our close attention. It shows the relationship between demographics, benefit generosity, and tax burdens.

Here’s how Capretta describes the relationship.

…for each of the stipulated replacement rates (25, 50, and 75 percent), the tax rate necessary to keep the program solvent rises with increases in the aged dependency ratio. This explains why social insurance taxes in many aging societies have been increased to high levels in recent decades.

I’ve taken the liberty of augmenting the chart to show how these factors interact (though the order of #1 and #2 doesn’t matter).

The bottom line is that the United States is on track to become a high-tax, European-style welfare state if fiscal policy is left on autopilot.

In other words, unless there’s genuine entitlement reform, future Americans will be condemned to lower living standards.

P.S. Here’s some more history. In a column for the American Institute for Economic Research, Richard Ebeling looked at British history to explain how the private sector played a role in social insurance before being displaced by government.

Throughout the 19th century, a primary means for the provision of what today we call the “social safety nets” was by the private sector outside of government. The British Friendly Societies were mutual assistance associations that emerged to provide death benefits for the wives and children of the breadwinner who had passed away. But they soon offered a wide array of other mutual insurance services, including health care coverage, retirement pension programs, unemployment insurance, savings clubs to purchase a family house, and a variety of others. …by the end of the 19th century around two-thirds to three-quarters of the entire British population was covered by one or more of their programs and insurances. The research also discovered that a large majority of the subscribers were in the lower income brackets of the time… What stands out is that these were all private and voluntary associations and exchanges, in which the government paid little or no role.

On a related note, here’s an excellent short video on the English “poor laws” from the 1800s.

P.P.S. In addition to the fiscal burden of entitlement programs, there’s also a major problem in the way these programs discourage work.

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Senator Warren’s Looney Medicare-for-All Scheme

I’ve always considered Senator Bernie Sanders to be the most clueless and misguided of all presidential candidates.

But I also think “Crazy Bernie” is actually sincere. He really believes in socialism.

Elizabeth Warren, by contrast, seems more calculating. Her positions (on issues such as Social Security, corporate governance, federal spending, taxation, Wall Street, etc).) are radical, but it’s an open question whether she’s a true believer in statism. It’s possible that she simply sees a left-wing agenda as the best route to winning the Democratic nomination.

Regardless of motive, though, her proposals are economic lunacy. So maybe it’s time to give her “Looney Liz” as a nickname.

Consider, for instance, her new Medicare-for-All scheme. She got hammered for promising trillions of dollars of new goodies without specifying how it would be financed, so she’s put forward a plan that ostensibly fits the square peg in a round hole.

But as Chuck Blahous of the Mercatus Center explains, her plan is a farce.

…presidential candidate Sen. Elizabeth Warren released her proposal to ostensibly pay for the costs of Medicare for All (M4A) without raising taxes on the middle class. As published, the plan would not actually finance the costs of M4A. …the Warren proposal understates M4A’s costs, as quantified by multiple credible studies, by about 34.2%. Another 11.2% of the cost would be met by cutting payments to health providers such as physicians and hospitals. Approximately 20% of the financing is sought by tapping sources that are unavailable for various reasons, for example because she has already committed that funding to other priorities, or because the savings from them was already assumed in the top-line cost estimate. The remaining 34.6% would be met by an array of new and previous tax proposals, most of it consisting of new taxes affecting everyone now carrying employer-provided health insurance, including the middle class.

Here’s a pie chart showing that Warren is relying on smoke and mirrors for more than 50 percent of the financing.

By the way, the supposedly real parts of her plan, such as the new taxes, are a very bad idea.

Brian Riedl of the Manhattan Institute unleashed a flurry of tweets exposing flaws in her proposal.

Since I’m a tax wonk, here’s the one that grabbed my attention.

Combination of 35% corporate rate (worldwide, no deferral), “Real corporate profits tax,” curtail depreciation, huge capital gains taxes, financial transactions tax, bank tax, and 6% wealth tax is economic fantasyland. Taxes on capital would be through the roof. 9/

— Brian Riedl 🧀 🇺🇦 (@Brian_Riedl) November 1, 2019

Wow. Higher taxes on domestic business income, higher taxes on foreign-source business income, higher taxes on business investment, more double taxation of capital gains, a tax on financial transactions, and a very punitive wealth tax (which would be a huge indirect tax on all saving and investment).

If ever enacted, the United States presumably would drop to last place in the Tax Foundation’s competitiveness ranking.

And let’s not forget that Medicare-for-All would dramatically increase the burden of government spending. In one fell swoop, we’d become Greece.

Actually, that probably overstates the damage. Based on my Lassez-Faire Index, I’m guessing we’d be more akin to Spain or Belgium (in other words, falling from #6 in the rankings to the #35-#40 range according to Economic Freedom of the World).

P.S. Don’t forget that Medicare has a massive shortfall already.

P.P.S. Looney Liz’s plan is terrible fiscal policy, but keep in mind it’s also terrible health policy since it would exacerbate the third-party payer problem.

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“Medicare for All” Would Copy the Bad Features of the U.K.’s Government-Run System

The so-called Green New Deal is only tangentially related to climate issues.

It’s best to think of it as the left’s wish list, and it includes a paid leave entitlement, government jobs, infrastructure boondoggles, and an expansion of the already bankrupt Social Security system.

But the most expensive item on the list is “Medicare for All,” which is a scheme concocted by Bernie Sanders to have the government pay for everything.

Would this be a good idea? In a column for Forbes, Sally Pipes of the Pacific Research Institute explains that government-run healthcare in the United Kingdom has some very unfriendly features.

Nearly a quarter of a million British patients have been waiting more than six months to receive planned medical treatment from the National Health Service, according to a recent report from the Royal College of Surgeons. More than 36,000 have been in treatment queues for nine months or more. …Consider how long it takes to get care at the emergency room in Britain. Government data show that hospitals in England only saw 84.2% of patients within four hours in February. …Wait times for cancer treatment — where timeliness can be a matter of life and death — are also far too lengthy. According to January NHS England data, almost 25% of cancer patients didn’t start treatment on time despite an urgent referral by their primary care doctor. …And keep in mind that “on time” for the NHS is already 62 days after referral.

If this sounds like the VA health care system, you’re right.

Both are government run. Both make people wait.

And both produce bad outcomes. Here’s some of the data from the British system.

Unsurprisingly, British cancer patients fare worse than those in the United States. Only 81% of breast cancer patients in the United Kingdom live at least five years after diagnosis, compared to 89% in the United States. Just 83% of patients in the United Kingdom live five years after a prostate cancer diagnosis, versus 97% here in America.

Just like I told Simon Hobbs on CNBC many years ago.

The best part of Sally’s column is that she explains how the flaws in the U.K. system are being copied by Bernie Sanders and other supporters.

Great Britain’s health crisis is the inevitable outcome of a system where government edicts, not supply and demand, determine where scarce resources are allocated. Yet some lawmakers are gunning to implement precisely such a system in the United States. The bulk of the Democratic Party’s field of presidential candidates — including Senators Kirsten Gillibrand, Kamala Harris, and Elizabeth Warren — co-sponsored Senator Bernie Sanders’s 2017 “Medicare for All” bill. That plan would abolish private insurance and put all Americans on a single government-run plan… Britons face long waits for poor care under their country’s single-payer system. That’s not the sort of healthcare model the American people are looking for.

The bottom line is that Medicare for All would further exacerbate the third-party payer problem that already plagues the health care system.

And that means ever-escalating demand, rising costs, and inefficiencies.

There are only two ways of dealing with the cost spiral. One option is huge tax increases, which would result in a massive, European-style tax burden on the lower-income and middle-class taxpayers.

Taxpayers in the U.K. endure higher burdens than their counterparts in America, But they also suffer from the second option for dealing with the cost spiral, which is rationing.

Some of the data was in Ms. Pipes’ column.

If you want more examples (and some horrifying examples), you can click stories from 2017, 2016, 2015, 2014, 2013, and 2012.

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Six Sobering Charts about America’s Grim Future from CBO’s New Report on the Long-Run Fiscal Outlook

I sometimes feel like a broken record about entitlement programs. How many times, after all, can I point out that America is on a path to become a decrepit European-style welfare state because of a combination of demographic changes and poorly designed entitlement programs?

But I can’t help myself. I feel like I’m watching a surreal version of Titanic where the captain and crew know in advance that the ship will hit the iceberg, yet they’re still allowing passengers to board and still planning the same route. And in this dystopian version of the movie, the tickets actually warn the passengers that tragedy will strike, but most of them don’t bother to read the fine print because they are distracted by the promise of fancy buffets and free drinks.

We now have the book version of this grim movie. It’s called The 2017 Long-Term Budget Outlook and it was just released today by the Congressional Budget Office.

If you’re a fiscal policy wonk, it’s an exciting publication. If you’re a normal human being, it’s a turgid collection of depressing data.

But maybe, just maybe, the data is so depressing that both the electorate and politicians will wake up and realize something needs to change.

I’ve selected six charts and images from the new CBO report, all of which highlight America’s grim fiscal future.

The first chart simply shows where we are right now and where we will be in 30 years if policy is left on autopilot. The most important takeaway is that the burden of government spending is going to increase significantly.

Interestingly, even CBO openly acknowledges that rising levels of red ink are caused solely by the fact that spending is projected to increase faster than revenue.

And it’s also worth noting that revenues are going up, even without any additional tax increases.

The bottom part of this chart shows that revenues from the income tax will climb by about 2 percent of GDP. In other words, more than 100 percent of our long-run fiscal mess is due to higher levels of government spending. So it’s absurd to think the solution should involve higher taxes.

This next image digs into the details. We can see that the spending burden is rising because of Social Security and the health entitlements. By the way, the top middle column on “other noninterest spending” shows one thing that is real, which is that defense spending has fallen as a share of GDP since the mid-1960s, and one thing that may not be real, which is that politicians somehow will limit domestic discretionary spending over the next three decades.

This bottom left part of the image also gives the details on built-in growth in revenues from the income tax, further underscoring that we don’t have a problem of inadequate revenue.

Here’s a chart that shows that our main problem is Medicare, Medicaid, and Obamacare.

Last but not least, here’s a graphic that shows the amount of fiscal policy changes that would be needed to either reduce or stabilize government debt.

I think that’s the wrong goal, and that instead the focus should be on reducing or stabilizing the burden of government spending, but I’m sharing this chart because it shows that spending would have to be lowered by 3.1 percent of GDP to put the nation on a good fiscal path.

Some folks think that might be impossible, but I’ll simply point out that the five-year de facto spending freeze that we achieved from 2009-2014 actually reduced the burden of government spending by a greater amount. In other words, the payoff from genuine spending restraint is enormous.

The bottom line is very simple.

We need to invoke my Golden Rule so that government grows slower than the private sector. In the long run, that will require genuine entitlement reform.

Or we can let America become Greece.

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Three Not-so-Great Moments in Government-Run Healthcare

Government intervention has messed up the healthcare sector, leading to needlessly high prices and massive inefficiency.

Fixing the mess won’t be easy since it would involve addressing several contributing problems, including Medicare, Medicaid, the healthcare exclusion in the tax code, Obamacare, and the mess at the Veterans Administration.

But at least we know the right solutions. We need entitlement reform and tax reform in order to restore a genuine free market and solve the government-created third-party payer crisis.

And to bolster the case for reform, we’re going to look at three new examples of how government intervention makes the healthcare system worse rather than better.

For our first example, let’s look at a new report from the National Center for Policy Analysis, which compares what happens when the federal government decides to build a hospital with a similar project constructed by a local government with private-sector involvement.

We’ll start with a look at Veterans Administration project.

…the VA hospital in Denver, Colorado, was run-down, crowded and outdated. …the VA considered renovating the medical facilities of the Fitzsimons Army Medical Center at a cost of $30 million. Then, the University of Colorado Hospital offered to open jointly-operated facilities for $200 million. VA officials passed on both ideas due to cost concerns. Instead, officials sought and received approval for a stand-alone facility.

That decision was very costly for taxpayers.

The VA failed to produce a design that could be built for its budget of $604 million, ultimately causing a budget-busting $1 billion overrun. …Soon, the plan to build an affordable replacement morphed into the most extravagant and expensive hospital construction project in VA history.

And, as is typical of government projects, the cost to taxpayers was far higher than initial estimates used to justify the project.

Now let’s look at another project, this one in Dallas, Texas.

…the original Parkland Hospital was built in Dallas to serve the young city’s indigent population. …its aging facilities could no longer meet the demand of 1 million patients admitted each year. …The project to rebuild Parkland, split roughly 60/40 in revenue sources, was accountable to both the public and its private donors. …Project managers hired an independent auditor to monitor all project transactions. Budget progress reports were made available to both Parkland’s Board and the public.

The final outcome was far from perfect (after all, local governments are also quite capable of wasting money). But the involvement of the private sector, combined with the fact that the local government was spending its own money, created incentives for a much better outcome.

On the first day of construction, Parkland’s project team was $100 million over budget. But a flexible design, and a willingness to balance needs and wants, allowed the team to deliver a larger, more cost-effective hospital than originally conceived for a mere 6 percent increase in budget.

And here’s a chart from the NCPA report that perfectly captures the difference between the federal government and a project involving a local government and the private sector.

Can you think of a better argument for local private-public partnerships over the federal government?

Yet policy keeps moving in the wrong direction in Washington.

The Obamacare boondoggle was all about increasing the federal government’s control and intervention in the healthcare sector.

And this brings us to our second not-so-great example of government-run healthcare.

The New York Times has a story with a real-world example showing how the President’s failed legislation is hurting small businesses.

LaRonda Hunter…envisioned…a small regional collection of salons. As her sales grew, so did her business, which now encompasses four locations — but her plans for a fifth salon are frozen, perhaps permanently.

And why can’t she expand her business and create jobs?

Because Obamacare makes it impossible.

Starting in January, the Affordable Care Act requires businesses with 50 or more full-time-equivalent employees to offer workers health insurance or face penalties that can exceed $2,000 per employee. Ms. Hunter, who has 45 employees, is determined not to cross that threshold. Paying for health insurance would wipe out her company’s profit and the five-figure salary she pays herself from it, she said.

And Ms. Hunter is just the tip of the iceberg.

For some business owners on the edge of the cutoff, the mandate is forcing them to weigh very carefully the price of growing bigger. “There’s kind of a deer-in-headlights moment for those who say, ‘I have this new potential client, but if I bring them on, I have to hire five additional people,’” said Philip P. Noftsinger, the payroll unit president at CBIZ, a financial services provider for businesses. “They’re really trying to assess how much the 50th employee is going to cost. …Added to that cost are the administrative requirements. Starting this year, all companies with 50 or more full-time workers — even those not yet required to offer health benefits — must file new tax forms with the Internal Revenue Service that provide details on employee head count and any health insurance offered. Gathering the data requires meticulous record-keeping. “These are some of the most complex informational returns we’ve ever seen,” said Roger Prince, a tax lawyer.

Here’s another real-world example.

The expense and distraction of all that paperwork is one of the biggest frustrations for one business owner, Joseph P. Sergio. …He is reluctant to go over the 50-employee line and incur all of the new rules that come with it. That makes bidding for new jobs an arduous and risky exercise. …”If you ramp up, and it pushes you over 50, there’s all these unknown costs and complicated rules. Are we really going to be able to benefit from going after that opportunity? It freezes you at a time when you need to be moving fast.”

And don’t forget that while Obamacare discourages entrepreneurs from creating jobs, it also discourages people from seeking jobs.

That’s the kind of two-for-one special that’s only possible with big government!

Now that we’ve cited examples of bad policy from the Veterans Administration and Obamacare, let’s turn to Medicare for our third example.

Veronique de Rugy of the Mercatus Center writes about rampant Medicare fraud in her syndicated column.

Medicare is rife with fraud, and every year, billions of dollars are improperly paid out by the federal government’s giant health care bureaucracy. According to the government’s latest estimates, Medicare fee-for-service (parts A and B) made $46 billion in improper payments last year. And Medicare Advantage (Part C) and Medicare Prescription Drug Coverage (Part D) combined for another $15 billion in improper payments. Even more disturbing is the possibility that these numbers underestimate the annual losses to taxpayers from fraud and bureaucratic bungling. According to the work of Harvard University’s Malcolm Sparrow, fraud could account for as much as 20 percent of total federal health care spending, which would be considerably higher than what the government’s figures indicate.

None of this should be a surprise. Medicare has a notorious history of waste, fraud, and abuse.

But there is a glimmer of good news. There’s actually a program to identify and recover wasted funds.

The RAC program is geared toward correcting improper payments… The auditors thus pay for themselves with the money they recoup instead of simply being handed a lump-sum check. That the RAC program has an incentive to reduce wasteful spending and save taxpayers money makes it fairly unusual among government initiatives.

Unfortunately, no good deed goes unpunished in Washington.

…bureaucrats are set to greatly diminish the program’s effectiveness in 2016. Rather than empower these fraud hunters, they are drastically reducing the number of paid claims that auditors can review every 45 days (from 2 percent down to just 0.5 percent). The new limits will make it that much harder for auditors — whose cost already amounts to just a drop in the bucket — to recoup taxpayer losses.

I’ve also written about this absurd effort to curtail the RAC program, but Veronique makes a critically important observation that has widespread applicability to so much of what happens with government.

Agency failure is routinely rewarded in Washington with bigger budgets and greater authority, but here success will not be.

This, in a nutshell, is the difference between the private sector and the government.

In my speeches, I sometimes point out that people in the private economy make mistakes all the time, but I also explain that the incentive to earn profits and avoid losses creates a powerful incentive structure to quickly learn from mistakes.

That means resources quickly get reallocated in ways that are more likely to boost economic efficiency and increase growth and living standards.

In government, by contrast, this process is reversed. Bureaucrats and politicians reflexively argue that failure simply means that budgets should be expanded.

All of which explains why these cartoons are such perfect depictions of government.

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Instead of Fighting to Protect Taxpayers, Politicians Are Enabling Medicare Fraud

Yesterday, I shared several stories that exposed the festering corruption of Washington.

Today, let’s look at one issue that symbolizes the pervasive waste of Washington.

Medicare is the federal government’s one-size-fits-all health program for the elderly. Because of its poor design, it bears considerable responsibility for two massive problems.

1. It contributes to the systemic third-party payer problem in American health care.
2. It exacerbates America’s long-run challenge of excessive entitlement spending.

But there’s another issue. Medicare also has a very serious problem with fraud. As is so often the case with government programs, the offer of free money encourages unethical behavior.

Well, we have some good news and bad news about Medicare fraud.

As reported by the Wall Street Journal, the good news is that there is a small effort to catch fraudsters who bilk taxpayers.

Recovery audit contractors, as they are known, recouped $2.4 billion in improper payments in 2014, down from $3.7 billion in 2013 before the agency scaled back other audit activities and temporarily suspended the program… Those recoveries represent just a fraction of the total amount Medicare estimates it spends on incorrect payments. The Medicare program made $58 billion in improper payments to medical providers and health plans in 2014, according to PaymentAccuracy.gov, a federal website that tracks agencies’ estimates of waste.

But the bad news is this small program is being curtailed.

The federal Medicare agency is sharply cutting back the work of auditors that review hospital claims and seek to recoup improper payments for the government… Starting in January, the auditors will be able to review only 0.5% of the claims the agency pays to each hospital or provider every 45 days, according to an Oct. 28 letter to the contractors. That is a quarter of the prior threshold: 2% of claims. The contractors say the new directive, in what is known as a “technical direction letter,” will further limit their ability to pursue undue payments.

Readers are probably wondering why this effort is being hamstrung instead of expanded.

Well, you won’t be surprised to learn that the folks who benefit from waste want to keep the gravy train rolling.

The latest step is a sign of how the $600-billion-a-year Medicare program can struggle to effectively rein in improper payments, fraud and waste, sometimes under pressure from medical providers… The Medicare agency “is getting a lot of pressure from the provider community to scale back the [audit] program,” said Kristin Walter… Hospital representatives welcomed further restrictions on the auditors.

Sort of like burglars welcoming “further restrictions” on police officers.

Unfortunately, the interest groups benefiting from waste and fraud have allies in government.

The American Thinker has a nauseating story about the fraudulent actions of a hospital in Houston

The president of Riverside, his son, and five others were arrested on October 4 as part of a nationwide Medicare fraud sweep.  Earnest Gibson III, chief executive officer of Riverside General Hospital for 30 years, has been charged with bilking $158 million out of Medicare over the last seven years. …Friday’s arrests at Riverside came nine months after the arrest of Mohammad Khan, the hospital’s acting administrator, who pled guilty to his role in the Medicare fraud scheme…the Centers for Medicare and Medicaid Services suspended payments to Riverside.

You may be wondering why this is a nauseating story when it appears that some bad guys were nailed for screwing taxpayers.

Well, now we get to the disgusting part. A politician in Washington has been fighting to enable that bad behavior.

Sheila Jackson Lee, congresswoman for Houston’s 18^th district…wrote CMS Acting Director Marilyn Tavenner requesting she reconsider the agency’s decision. …Jackson Lee…asks taxpayers who have already been bilked out of hundreds of millions of dollars to pour more money into a…hospital run by alleged crooks…while administrators and politicians rake in more dough.

Sadly, the Congresswoman’s political pressure generated results.

…a month after Jackson Lee appealed to CMS…, 70% of the hospital’s Medicare payments were restored.  CMS lifted the suspension even though federal investigators were only two months away from arresting Gibson and the others.  Jackson Lee’s intervention seems to have caused even more taxpayer monies to be directed toward a hospital brimming with corruption. …This is why Washington, D.C. is broken.  Like Jackson Lee, too many politicians think that redistributing other people’s hard-earned money into the pockets of potential felons is okay as long as they get political benefit.

By the way, it’s not just Democrats. The Daily Surge reports that some Republicans are helping providers rip off taxpayers.

…efforts to rid Medicare of waste, fraud and abuse have been stymied by the power of the hospital lobby that refuses to payback excessive payments made by Medicare and are working with friends and allies in government to ensure the improper payments are never returned to the taxpayers. …at least one GOP members, Rep. Sam Graves (R-MO) has actually introduced legislation further limiting the ability of the auditors to sniff out waste. His bill would block audits of Medicare providers unless their estimated error rate exceeded 40% of total billing. More than one third of all Medicare bills would have fraudulent before an audit could be triggered. So much for good government.

Ugh, makes me want to take a shower.

So what’s the bottom line? Unfortunately, fraud is an inherent part of government. When politicians create redistribution programs, amoral and immoral people will figure out ways to maximize their share of the loot.

In the case of Medicare, it means that providers have huge incentives to over-charge, over-diagnose, over-treat, and over-test.

After all, thanks to third-party payer, the patient doesn’t care.

That’s why I’m in favor of programs to combat fraud. And the RAC program doesn’t even cost taxpayers any money since the auditors are compensated by getting a slice of the improper payments that are recovered.

Imagine that, a policy where the incentives are to save money for taxpayers!

However, the only long-run and permanent solution is to shrink the size of government.

And that’s why it’s time to restructure Medicare. We have 50 years of evidence that the current approach doesn’t work.

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After 50 Years, We’ve Learned Enough to Know Medicare Should Get Early Retirement

Not all birthdays are a cause for untrammeled joy. Most of us baby boomers, for instance, don’t like being reminded that we’re getting older.

And for folks who follow fiscal policy, the fact that Medicare is now 50 years old is hardly a cause for celebration. That’s because the program, as one of the three big entitlement programs, will turn American into Greece without substantial structural reform.

But it’s not just a budgetary issue.

Writing for the Wall Street Journal, Sally Pipes of the Pacific Research Institute opines that this isn’t a happy birthday for taxpayers, seniors, or the healthcare system.

The only birthday gift this middle-age government program merits is a reality check. Health insurance for senior citizens was part of LBJ’s expansion of the welfare state, all in the service of establishing a “Great Society.” Yet many beneficiaries today are struggling to secure access to high-quality care. Future beneficiaries, meanwhile, are forking over billions of dollars today to keep a program afloat that may be bankrupt when they retire.

Like many government programs, it is far more expensive than initially promised.

Medicare spending has zoomed far beyond original expectations and is now anything but sustainable. In its first year, 1966, Medicare spent $3 billion. In 1967 the House Ways and Means Committee predicted that the program would cost $12 billion by 1990. It ended up costing $110 billion that year. Last year the program cost $511 billion, and seven years from now it will double to more than $1 trillion, according to the Kaiser Family Foundation.

And like many government programs, it is riddled with waste, fraud, and abuse.

Medicare has been dogged by fraud and other improper payments—$60 billion overall in fiscal 2014, according to a recent report by the Government Accountability Office.

You can click here if you want some jaw-dropping examples of how the program squanders money.

Moreover, many doctors don’t want to treat Medicare recipients because they lose money after you included the expense of accompanying paperwork and regulations.

…nearly three in 10 seniors on Medicare struggle to find a primary-care doctor who will treat them, according to the Medicare Payment Advisory Commission. Another survey conducted by Jackson Healthcare, the health-care staffing company, found that 10% of the more than 2,000 physicians it surveyed don’t see Medicare patients at all.

So what’s the solution?

We’ve tried price controls and that doesn’t work.

Other approaches also won’t be adequate. So the only answer, Sally explains, is to shift to a form of vouchers sometimes called “premium support.”

…tweaking the eligibility age won’t be enough. If Medicare is to survive into old age, the program has to be converted from an open-ended entitlement to a system of means-tested vouchers. Under such a system, the government would give every senior a voucher based on health status, income and age. Seniors in better health and those who are wealthy would receive smaller vouchers. Sicker or needier seniors would receive larger ones. Seniors would then choose from among privately administered health plans the one that best suited their needs and budget. Insurers would have to compete for beneficiaries’ business, and providers would have to compete to get on the most popular plans. Lower prices and better-quality care would be the result.

Grace-Marie Turner of the Galen Institute and Merrill Matthews of the Institute for Policy Innovation have a similarly pessimistic perspective.

In a column for Investor’s Business Daily, they highlight some of the same problems with cost and quality, but they also add important insight about how Medicare has caused rising health care costs.

…health economist Theodore Marmor pointed out: “Hospital price increases presented the most intractable political problem for the Johnson administration. In the first year of Medicare’s operation, the average daily service charge in America’s hospitals increased by an unprecedented 21.9%. Each month the Labor Department’s consumer price survey reported further increases…”

Gee, what a surprise. With Uncle Sam picking up the tab, normal market forces were eroded and providers responded by jacking up prices.

The federal government has responded with price controls, but that’s been predictably ineffective.

Congress imposed a type of price-control mechanism in 1983 called Diagnostic Related Groups, or DRGs. And in the early 1990s, Congress tried to cut spending on physicians by creating the Resource Based Relative Value Scale. Then there was the infamous Medicare “Sustainable Growth Rate,” later dubbed the “doc fix,” which passed in 1996 to contain Medicare spending by cutting doctors’ fees. It was repealed only recently, after Congress had postponed the vote 17 times.

So what’s the bottom line?

Government involvement dramatically increases spending, followed by clampdowns on soaring prices, leading to restrictions on doctors and patients. Perhaps next time, we might try market forces rather than another failed effort at centralized government programs.

Or we can simply leave policy on autopilot and somehow have faith that Obamacare’s death panels will “solve” the problem.

P.S. Here’s the video I narrated which explains the importance of the right kind of Medicare reform.

And if you want (what I think) is a very good description of the program, it’s that Medicare charges seniors for a hamburger and gives them a hamburger, but taxpayers are getting a bill for a steak.

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Obamacare, Cost Curves, the Ever-Worsening Entitlement Crisis, and the Case for Spending Restraint

I’m very worried about the burden of government spending.

Moreover, I’m quite concerned that poorly designed entitlement programs will lead to fiscal disaster.

And I’m especially irked that Obama made the problem worse by ramming through yet another misguided and costly health care entitlement.

Given this background, you can imagine that I was very interested (and depressed) to see that Veronique de Rugy of the Mercatus Center put together some very important charts and analysis based on new fiscal policy projections.

After crunching the new numbers from CBO, here’s her bottom line conclusion.

…data from the Congressional Budget Office’s (CBO) recently released update to its Budget and Economic Outlook to show the trends and components of projected revenue and outlay increases. …growing entitlement obligations and net interest payments are projected to push outlays (spending) to grow faster than revenues over much of the next decade.

She also produced a chart showing the ever-rising burden of both taxes and spending. Pay close attention to how the numbers get worse at a rapid rate over the next 10 years.

There are two important takeaways from this data.

First, it should be abundantly clear that Washington is not suffering from inadequate tax revenue. Receipts are projected to rise in nominal dollars, in inflation-adjusted dollars, and as a share of GDP.

In other words, America’s long-run fiscal problems are solely a result of a rising burden of government spending.

Second, on the topic of government spending, it’s important to understand that the problem is overwhelmingly caused by entitlement programs. Social Security is part of the problem, but the real issue is government-run healthcare.

The President claimed Obamacare would “bend the cost curve.” But he wasn’t truthful since the White House implied the legislation would bend the curve down rather than up.

Here’s a second chart showing the breakdown of various spending categories.

As you can see, the problem is entitlements. And the healthcare entitlements deserve the lion’s share of the blame.

If this chart isn’t sufficiently depressing, then keep in mind that the numbers get even worse after 2024.

Simply states, the United States is doomed to become another Greece in the absence of genuine entitlement reform.

But let’s focus just on the next 10 years. Ms. de Rugy adds some detail.

…CBO projects three large budget categories—major health care programs (consisting of Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies for health insurance), Social Security, and net interest payments on the debt—will account for 85 percent of the total increase in outlays from 2014 to 2024. Total outlays are projected to increase from roughly $3.5 trillion in 2014 to $5.8 trillion in 2024, for a total increase of $2.3 trillion. Major health care programs are projected to grow by $816 billion, which accounts for 32 percent of the total. Social Security spending will grow by $654.9 billion over the next decade, which constitutes 28 percent of the total increase in outlays.

Let’s close, though, with some good news.

The numbers in the previous charts are all based on what happens if government policy is left on autopilot.

But what happens if politicians impose a modest bit of spending restraint?

According to the latest CBO forecast, inflation is supposed to average almost 2 percent over the next 10 years. So if some sort of spending cap is imposed and outlays “only” grow by a commensurate amount, it turns out that there’s a remarkably quick change in America’s fiscal profile.

As seen in this chart, there’s a budget surplus by 2019. And more important, government spending by 2024 is about $1.5 trillion lower than it would be with the budget left on autopilot.

Here’s a video from a few years ago. The numbers are out of date, but the underlying analysis is still completely appropriate. Simply stated, it’s very easy to balance the budget if politicians simply follow the Golden Rule of spending restraint.

P.S. Since this was a somewhat depressing topic, let’s close with some humor.

A few years ago, I shared a satirical application form for bailout money from Uncle Sam. Well, the New Yorker has an application quiz for Syrian rebels seeking American dollars.

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The Medicare Money Pit of Waste, Fraud, and Abuse

Since I primarily work on fiscal policy, I normally look at the budgetary impact of entitlement programs. And the numbers are very grim.

But I’m also an economist, so I periodically comment on how government intervention undermines the efficient functioning of markets in the healthcare field.

Last but not least, I’m also a taxpayer, so I can’t resist occasionally expressing my frustration at how the government is a giant pinata of waste fraud and abuse. And government-run healthcare seems especially vulnerable.

Huge amounts of money bilked from taxpayers for supposed counseling sessions financed by Medicare and Medicaid.

Medicare getting scammed to pay for plastic surgery.

Russian diplomats scheming to get their healthcare costs covered by Medicaid.

We now have another example to add to the list.

The Washington Post has an excellent expose on how government incompetence has made Medicare a prime target for fraudsters and other crooks.

…in a Los Angeles courtroom, Bonilla described the workings of a peculiar fraud scheme that — starting in the mid-1990s — became one of the great success stories in American crime. The sucker in this scheme was the U.S. government. …The tool of the crime was the motorized wheelchair. The wheelchair scam was designed to exploit blind spots in Medicare, which often pays insurance claims without checking them first. Criminals disguised themselves as medical-supply companies. They ginned up bogus bills, saying they’d provided expensive wheelchairs to Medicare patients — who, in reality, didn’t need wheelchairs at all. Then the scammers asked Medicare to pay them back, so they could pocket the huge markup that the government paid on each chair. …The government paid. Since 1999, Medicare has spent $8.2 billion to procure power wheelchairs and “scooters” for 2.7 million people. Today, the government cannot even guess at how much of that money was paid out to scammers.

Wow. Billions of dollars of fraud and the government to this day still can’t figure out the level of theft.

And wheelchair fraud is just a small slice of the problem.

…while it lasted, the scam illuminated a critical failure point in the federal bureaucracy: Medicare’s weak defenses against fraud. The government knew how the wheelchair scheme worked in 1998. But it wasn’t until 15 years later that officials finally did enough to significantly curb the practice. …Fraud in Medicare has been a top concern in Washington for decades, in part because the program’s mistakes are so expensive. In fiscal 2013, for instance, Medicare paid out almost $50 billion in “improper payments.”

You won’t be surprised to learn that fraud is so lucrative because the government routinely over-pays for items.

…The original equipment scam had sprung up in the 1970s, at a time when Medicare was young and criminals were still learning how to steal its money. Doctors, for example, could bill Medicare for exams they didn’t do. Hospitals could bill for tests that patients didn’t need. The equipment scam was the poor man’s way in, an entry-level fraud that didn’t require a medical degree or a hospital. …“Let me put it to you this way: An $840 power wheelchair, Medicare pays close to $5,000 for. So there’s a huge profit margin there. Huge,” said one California man who participated in a recent fraud scheme involving wheelchairs.

So this isn’t just a story about government incompetence and taxpayer ripoffs, it’s also a story which shows why third-party payer is a recipe for excessive healthcare spending.

The good news is that the wheelchair scam is slowly fading away.

The bad news is that the overall problem of a poorly designed entitlement system ensures that scammers and other crooks will simply come up with other ways to pillage taxpayers.

Today, even while the wheelchair scam is in decline, that same “pay and chase” system is allowing other variants of the Medicare equipment scam to thrive. They aren’t perfect. But they work.  In Brooklyn, for instance, the next big thing is shoe inserts. Scammers bill Medicare for a $500 custom-made orthotic, according to investigators. They give the patient a $30 Dr. Scholl’s.

Geesh.

When examining entitlements, I’ve  argued that Medicaid reform is the biggest priority.

But perhaps the rampant fraud means Medicare should be addressed first.

Though the right answer is to reform both programs, which is why I’m so pleased that the House of Representatives has approved the Ryan budget for four consecutive years, even if each new proposal allows more spending than the previous one. What matters most if that Ryan’s plan block grants Medicaid and creates a premium support system for Medicare.

Those reforms won’t eliminate waste, fraud, and abuse, but the structural reforms will make it harder for crooks to take advantage of the programs.

P.S. If you want more background information on Medicare, here’s a post that explains why the program is so costly even though seniors don’t enjoy first-class benefits.

P.P.S. And here’s my video explaining why Medicare desperately needs reform.

But keep in mind we also need reform of Medicaid and Social Security.

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The Trans-Atlantic Version of Great Moments in Government-Run Healthcare

When government suppresses the free market and takes over the healthcare sector, you get some really odd results.

Consider these stories from Sweden:

 A man sewing up his own leg after getting frustrated with a long wait.

The government denying a wheelchair to a double amputee because the bureaucrats decided his impairment might not be permanent.

Speaking of amputations, an unfortunate man was put on such a long waiting list that his only treatment, when he was finally seen, was to have his penis removed.

Today, we’re going to augment that list. But not with another story from Sweden, which is actually a much better country in terms of public policy than most folks realize.

Instead, we’re going to look at some great moments in government-run healthcare in both the United States and the United Kingdom.

Our first story is from the Chicago Tribune and it deals with Medicaid and Medicare spending.

But we’re not going to look at the aggregate data. Those numbers are very sobering, to be sure, and you can click here and here to learn more about that problem.

Instead, we’re going to drill down into the details and get some up-close evidence of why the programs are so costly. Simply stated, providers learn how to bilk the government.

A few years ago, Illinois’ Medicaid program for the poor noticed some odd trends in its billings for group psychotherapy sessions. Nursing home residents were being taken several times a week to off-site locations, and Medicaid was picking up the tab for both the services and the transportation.  And then there was this: The sessions were often being performed by obstetricians and gynecologists, oncologists and urologists — “people who didn’t have any training really in psychiatry,” Medicaid director Theresa Eagleson recalled. So Medicaid began cracking down, and spending plummeted after new rules were implemented. …Illinois doctors are still billing the federal Medicare program for large numbers of the same services, a ProPublica analysis of federal data shows. Medicare paid Illinois providers for more than 290,000 group psychotherapy sessions in 2012 — more than twice as many sessions as were reimbursed to providers in New York, the state with the second-highest total. Among the highest billers for group psychotherapy in Illinois were three OB-GYNs and a thoracic surgeon. The four combined for 37,864 sessions that year, more than the total for all providers in the state of California. They were reimbursed more than $730,000 by Medicare in 2012 just for psychotherapy sessions, according to an analysis of a separate Medicare data set released in April.

Some of the specific examples are beyond belief. Keep in mind as you read the next passage that there are only 365 days in a year, and only about 261 workdays.

Of the Illinois OB-GYNs billing for group psychotherapy, Dr. Josephine Kamper had the highest number of sessions. She was paid for 10,399 sessions in 2012, at a cost to Medicare of $207,980. …Another OB-GYN, Lofton Kennedy Jr., billed for 9,154 group psychotherapy services. He declined to comment. The third-highest-billing OB-GYN, Philip Okwuje, charged Medicare for 8,584 group therapy sessions.  

Illinois isn’t the only place where taxpayers are getting ripped off.

A Queens, N.Y., primary care doctor, Mark Burke, was paid for more sessions than anyone else in the country — 20,841. He accounted for nearly one in every six sessions delivered in the entire state of New York in Medicare, separate data show. He did not return messages left at his office. Another large biller was Makeba Gordon, a social worker in Detroit. She was reimbursed for nearly 5,000 group therapy sessions for her 26 Medicare patients, an average of 190 each. She also billed for 2,820 individual psychotherapy visits for the same 26 patients, who allegedly would have received an average of 298 therapy sessions apiece in 2012. Gordon could not be reached for comment.

And I’m sure you won’t be surprised to learn that the bureaucracy in Washington doesn’t seem overly worried about this preposterous waste of money.

Aaron Albright, a spokesman for the U.S. Centers for Medicare & Medicaid Services, said in an email that Medicare has no policy regarding which physicians may perform group psychotherapy. During such sessions, “personal and group dynamics are discussed and explored in a therapeutic setting allowing emotional catharsis, instruction, insight, and support,” according to rules set out by one of Medicare’s contractors.

The second story comes from the United Kingdom.

Regular readers know that the government-run healthcare system in the United Kingdom is an ongoing horror story of denied care, sub-standard care, and patient brutality (click here to see some sickening examples).

You would think the U.K.’s political class would respond by trying to use money more effectively.

You would be wrong. The bureaucrats somehow have decided that tax monies should be used to finance a sperm bank, even though private sperm banks already exist.

Here are some excerpts from a report in the Daily Mail.

Britain is to get its first NHS-funded national sperm bank to make it easier for lesbian couples and single women to have children.For as little as £300 – less than half the cost of the service at a private clinic –  they will be able to search an online database and choose an anonymous donor on the basis of his ethnicity, height, profession and even hobbies. …The National Sperm Bank will be based at Birmingham Women’s NHS Foundation Trust, which currently runs an existing NHS fertility clinic and recruits sperm donors from the local population. Funded by a £77,000 Government grant, the bank will be run by the National Gamete Donation Trust (NGDT) which this year received  an additional £120,000 of public money to organise egg and sperm donation.

Some have criticized the initiative because it will purposefully increase the number of fatherless children.

…the move – funded by the Department of Health – is largely designed to meet the increasing demand from thousands of women who want to start a family without having a relationship with a man. Critics last night called it a ‘dangerous social experiment’ that could result in hundreds of fatherless ‘designer families’. …Ms Witjens rejected suggestions that children suffer adverse consequences from lacking a father figure. …Ms Witjens pointed to the removal of the reference to a ‘need for a father’ in the Human Fertilisation and Embryology Act, when taking account of a child’s welfare when providing fertility treatment.

I’m sympathetic to the argument that children do best in conventional households with fathers, but my main reaction to this story is that government shouldn’t try to either penalize or subsidize unconventional households.

And a government-sponsored sperm bank definitely falls into the latter category.

But I’m not surprised. Governments love to squanders other people’s money, and the U.K. government has considerable expertise (if you can call it that) in this regard.

Heck, the U.K. healthcare system is even financing boob jobs. But we’re not talking about reconstructive surgery for women who had mastectomies. They pay for breast augmentation for women who claim “emotional distress.”

Though maybe the U.K. government deserves a special prize. It developed a giveaway program that was so convoluted that nobody signed up to take the money.

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America’s Built-In Greek Fiscal Future

I had a very bad lunch today.

But not because of what I ate. My lunch was unpleasant because I moderated a noontime panel on Capitol Hill featuring Senator Ron Johnson of Wisconsin and my Cato colleague Chris Edwards.

And I should hasten to add that they were splendid company. The unpleasant part of the lunch was the information they shared.

The Senator, in particular, looked at budgetary projections over the next 30 years and basically confirmed for the audience that an ever-expanding burden of federal spending is going to lead to a fiscal crisis.

To be blunt, he showed numbers that basically matched up with this Henry Payne cartoon.

Here’s a chart from his presentation. It shows the average burden of spending in past years, compared to various projections of how much bigger government will be – on average – over the next three decades.

The Senator warned that the most unfavorable projection (i.e., “CBO ALT FISC”) was also the most realistic one. In other words, federal spending will consume a much larger share of economic output over the next three decades than it has over the past two decades.

But our fiscal outlook is actually even worse than what you see in his slide.

The Senator’s numbers are based on average spending levels over the 2015-2044 period. That’s very useful – and sobering – data, but if you look at the annual numbers, you’ll see that the trendline gives us additional reasons to worry.

More specifically, spending for the major entitlement programs (Social Security and Medicare, as well as Medicaid) is closely tied to the aging population. So as more and more baby boomers retire over the next couple of decades, spending on these programs will become more burdensome.

In other words, our fiscal problem will be much larger in 2040 than it will be in 2020.

Here are the long-run numbers from the Congressional Budget Office. The blue line is federal spending on various programs and the pink line is total spending (i.e., programmatic spending plus interest payments). And keep in mind that these numbers don’t include state and local government spending, which presumably will chew up another 15 percent of our economic output!

In other words, America will become Greece.

And don’t delude yourself into thinking that CBO must be wrong. I’m not a big fan of the Congressional Budget Office (particularly CBO’s economic analysis), but these numbers are driven by demographics.

Moreover, CBO’s grim outlook is matched by similarly dismal numbers from the IMF, BIS, and OECD.

By the way, CBO doesn’t do projections once federal government debt exceeds 250 percent of GDP, so the gray-colored trendline beginning about 2048 is not an official projections. It’s merely an estimate of the total spending burden assuming that the federal budget is left on autopilot.

Of course, we’ll never reach that level. We will suffer a fiscal crisis before that point. But when it happens to us, the IMF won’t be there to bail us out for the simple reason that the IMF’s credibility is based on the backing of American taxpayers.

And we’ll already have been bled dry!

So unless we find some very rich Martians (who are also stupid enough to bail out profligate governments), it won’t be a pretty situation. I’m not sure we’ll have riots, such as the ones that have taken place in Europe, but there will be plenty of suffering.

Fortunately, there is a solution. All we need is a modest bit of fiscal restraint so that government grows slower than the private sector. That would completely reverse Senator Johnson’s dismal long-run numbers.

And some countries have shown that multi-year periods of fiscal restraint are possible.

The real question, though, is whether politicians in America would be willing to adopt the entitlement reforms that are needed to control the long-run growth of spending.

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The Slow-Motion Train Wreck of Entitlement Programs

The Census Bureau just released a report on America’s aging population.

The big takeaway is that our population will be getting much older between now and 2050.

And since I’m a baby boomer, I very much like the fact that we’re expected to live longer.

But as a public finance economist, I’m not nearly as happy.

As I explain in this interview with the Wall Street Journal’s Digital Network (and as confirmed by BIS, OECD, and IMF data), the United States is going to get deluged by a tsunami of entitlement spending.

I mentioned that it’s important to focus on the ratio of workers to retirees. This “dependency ratio” matters because economic output largely is a function of an economy’s working-age population.

To cite my famous cartoons, you need a sufficient number of people pulling the wagon to support those riding in the wagon.

Here’s a chart from the Census report to help you understand the magnitude of the problem. As you can see, both in the United States and other nations, the increase in the dependency ratio is almost entirely the result of aging populations.

This is why I said that we face a slow-motion train wreck because of poorly designed entitlement programs.

But the good news is that there is time to reform those programs and avert a crisis.

Which explains why I probably sound like a broken record about the need for genuine entitlement reform.

In a column citing the new private pension system in the Faroe Islands, I gave the arguments for modernizing Social Security with personal retirement accounts.

But we also need to deal with the health entitlements.

Here’s how to fix Medicare.

And here’s how to fix Medicaid.

By the way, some of the damaging provisions of Obamacare can be de facto repealed by including them in the Medicaid block grant, so it’s a critically important reform.

Needless to say, I think these reforms are far better for the economy than the big tax hike Obama has endorsed to deal with the giant financing gap.

P.S. For a clever look at the worker-dependency ratio, check out the party ship produced by a Danish think tank.

P.P.S. The interviewer also mentioned that America’s racial composition is changing, which gives me an excuse to point out that Social Security reform is particularly beneficial for blacks because of differences in life expectancy.

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We Need a Debate about the Size of Government, but It Helps to Understand Basic Fiscal Facts

Self awareness is supposed to be a good thing, so I’m going to openly acknowledge that I have an unusual fixation on the size of government.

I don’t lose a wink of sleep thinking about deficits, but I toss and turn all night fretting about the overall burden of government spending.

My peculiar focus on the size and scope of government can be seen in this video, which explains that spending is the disease and deficits are just a symptom.

Moreover, my Golden Rule explicitly targets the spending side of the budget. And I also came up with a “Bob Dole Award” to mock those who mistakenly dwell on deficits.

With all this as background, you’ll understand why I got excited when I started reading Robert Samuelson’s column in today’s Washington Post.

Well, there’s a presidential whopper. Obama is right that the role of the federal government deserves an important debate, but he is wrong when he says that we’ve had that debate. Just the opposite: The White House and Congress have spent the past five years evading the debate. They’ve argued over federal budget deficits without addressing the underlying issues of what the government should do, what programs are unneeded, whether some beneficiaries are undeserving… The avoidance is entirely bipartisan. Congressional Republicans have been just as allergic to genuine debate as the White House and its Democratic congressional allies.

By the way, I have mixed feelings about the final sentence in that excerpt. Yes, Republicans oftentimes have displayed grotesque levels of fiscal irresponsibility. Heck, just look at the new farm bill. Or the vote on the Export-Import Bank. Or the vote on housing subsidies. Or…well, you get the point.

On the other hand, GOPers have voted for three consecutive years in favor of a budget that restrains the growth of federal spending, in large part because it includes much-needed reforms to major entitlement programs such as Medicare and Medicaid.

But Republican inconsistency isn’t our focus today.

I want to address other parts of Samuelson’s column that left a bad taste in my mouth.

He argues that you can’t balance the budget merely by cutting discretionary programs. That’s technically untrue, but it’s an accurate assessment of political reality.

I’m much more worried about his assertion that you can’t balance the budget even if entitlement spending also is being addressed.

Let’s look at what he wrote and then I’ll explain why he’s wrong.

Eliminating many programs that are arguably marginal — Amtrak, subsidies for public broadcasting and the like — would not produce enough savings to balance the budget. The reason: Spending on Social Security, Medicare and other health programs… But even plausible benefit trims for affluent retirees would still leave deficits. There would still be a need for tax increases.

This is wrong. Not just wrong, but demonstrably inaccurate.

The Ryan budget, for instance, balanced the budget in 2023. Without a single penny of tax hikes.

Senator Rand Paul and the Republican Study Committee also have produced balanced budget plans. Even as scored by the statists at the Congressional Budget Office.

By the way, you don’t even need to cut spending to balance the budget. Spending cuts would be desirable, of course, but the key to eliminating red ink is simply making sure that government spending climbs at a slower rate than revenues.

And since revenues are expected to grow by about 6 percent per year, it shouldn’t take advanced knowledge of mathematics to realize that the deficit will fall if spending grows by less than 6 percent annually.

Indeed, we could balance the budget as early as 2018 if spending merely was restrained so that the budget grew at the rate of inflation.

But never forget that the goal of fiscal policy should be shrinking the size and scope of the federal government, not fiscal balance.

Ask yourself the following questions. If $1 trillion floated down from Heaven and into the hands of the IRS, would that alter in any way the argument for getting rid of wasteful and corrupt parts of the federal leviathan, such as the Department of Housing and Urban Development?

If the politicians had all that extra money and the budget was balanced, would that mean we could – or should – forget about entitlement reform?

If there was no red ink, would that negate the moral and economic imperative of ending the welfare state?

In other words, the first part of Samuelson’s column is right. We need a debate about “the underlying issues of what the government should do, what programs are unneeded, whether some beneficiaries are undeserving.”

But we’re not going to come up with a good answer if we don’t understand basic fiscal facts.

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Medicare: Recipients Pay for Hamburger, They Get a Hamburger, but Taxpayers Are Being Charged for a Steak

One of the challenges of good entitlement reform (or even bad entitlement reform) is that recipients think they’ve “earned” benefits.

If you tell them that programs such as Medicare are unsustainable and need to be changed, some of them suspect you’re trying to somehow cheat them. After all, they were forced to cough up payroll taxes during their working year.

That’s true, but the real issue is how much did they pay in tax and how much are they getting back.

Here’s a very sobering chart from the recently released Long-Term Fiscal Outlook from the Congressional Budget Office.

It shows that people in their 50s, 60s, and 70s paid, on average, between $45,000-$65,000 of taxes into Medicare. That’s a big chunk of money, but it’s far less than the $160,000-$270,000 that Medicare will spend on them.

I’m tempted to say that current retirees and older workers are being charged for a hamburger but they’re getting a steak.

But that’s not accurate. As most recipients will tell you, Medicare leaves a lot to be desired, which is what you might expect with a government-run system.

So the right way to look at the program is that recipients are being charged for a hamburger, they’re getting a hamburger, but taxpayers (the ones who make up the funding gap) are being charged for a steak.

Which is why structural reform is the only good way of dealing with the program’s giant unfunded liability. As explained in this video from the Center for Freedom and Prosperity.

As discussed in the video, the reform (which has been part of the Ryan budget that’s been approved by the House) basically leaves the program as is for current retirees and older workers, but younger workers are allowed to move to a new system that gives them – upon retirement – the ability to choose their preferred health policy.

P.S. Don’t forget that we also need to reform Medicaid and Social Security, the other two big entitlement programs.

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An Amusing Look at Why We Need the Right Kind of Entitlement Reform

According to my reader poll, Michael Ramirez is the nation’s best political cartoonist.

His new masterpiece about entitlements is a good example of his talent. In one image, he manages to convey how the system lures people into danger by offering the illusion that they can get something for nothing.

The cartoon is an apt illustration of where we are today with programs such as Food Stamps and disability, with ever-greater numbers of people being lured into lives of dependency.

In other cases, though I’m afraid we’ve already passed the point of biting the hook, particularly for many of the middle-class entitlements. We’re now being reeled in and face a very real danger of being turned into euro-style fish filets.

Though if I’m allowed to extend the metaphor, many people are working to reform Social Security, Medicare, and Medicaid in hopes of escaping the hook of dependency and fiscal crisis.

But it’s very important to realize that not all entitlement reform is created equal. As I explained back in 2011, the left would be more than happy to impose price controls and means testing as part of a “grand bargain” that seduces gullible Republicans into accepting a tax hike.

Which is why this Glenn Foden cartoon hits the nail on the head.

Sort of reminds me of this Ramirez cartoon. Simply stated, Republicans are dangerously susceptible to bad deals, which helps to explain why tax-increase budget agreements are always fiscal disasters.

The moral of the story is that we need the right kind of entitlement reform, but that won’t be possible until at least 2017.

P.S. If you want a tragically funny look at how the welfare state changes people for the worse, read the politically correct version of The Little Red.

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Your Tax Dollars at Work: Medicare Financing Plastic Surgery

What’s the most absurd “health” expenditure by government?

Your tax dollars at work

There are lots of potential responses, including $240 million for penis pumps. Or how about the fact that Obamacare allows taxpayer-subsidized viagra for sex offenders?

But another potential answer is cosmetic surgery for “droopy eyelids.” Here are some of the details from a Miami Herald report.

Aging Americans worried about their droopy upper eyelids often rely on the plastic surgeon’s scalpel to turn back the hands of time. Increasingly, Medicare is footing the bill. Yes, Medicare. The public health insurance program for people over 65 typically does not cover cosmetic surgery… In recent years, though, a rapid rise in the number of so-called functional eyelid lifts, or blepharoplasty, has led some to question whether Medicare is letting procedures that are really cosmetic slip through the cracks — at a cost of millions of dollars. …From 2001 to 2011, eyelid lifts charged to Medicare more than tripled to 136,000 annually, according to a review of physician billing data by the Center for Public Integrity. In 2001, physicians billed taxpayers a total of $20 million for the procedure. By 2011, the price tag had quadrupled to $80 million. The number of physicians billing the surgery more than doubled. …surgeons also acknowledge an increased awareness of the surgery fueled by reality television, word-of-mouth referrals, and advertising that promises a more youthful appearance. And doctors concede they face increased pressure from patients to perform eyelid lifts, even when they do not meet Medicare’s requirement that peripheral vision actually be impaired.

Yet even though the Medicare requirements aren’t being met, these surgeries are still taking place. Why? Well, because the doctors and old people both realize that Uncle Sam will pay the bill so long as you make a nebulous claim that peripheral vision is affected.

Just like doctors and scammers will agree on a diagnosis of “bad back” or “mental illness” in order to get somebody on the taxpayer-financed disability gravy train.

In other words, once politicians create a pile of free money, people will figure out ways of getting their hands on that money.

That’s true for all programs.

But because of the amounts of money involved, Medicare is a far bigger problem than other programs, as explained in this video.

Which is why we desperately need the right kind of entitlement reform.

P.S. You won’t be surprised to know that other nations also have crazy government-financed health systems. In the United Kingdom, for instance, you can get a boob job at taxpayer expense. The government in the United Kingdom also provides taxpayer-financed sex trips to Amsterdam. And the bureaucrats at the European Commission get penile implants at public expense.

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Question of the Week: If You Could Reform only One Major Entitlement Program, Which One Would You Pick?

This is a tough question.

I obviously want comprehensive reform of all entitlement programs, so selecting just one is a bit of a challenge. Sort of like being asked to pick your favorite kid.

Would I reform Social Security? That’s a logical choice. It’s the biggest program in the federal budget, so it’s presumably the biggest problem.

And it sure would be nice to have personal retirement accounts, just like Australia, Chile, and other nations that have modernized their systems.

But Medicare and Medicaid are growing faster than Social Security and the Congressional Budget Office projects that those two entitlements eventually will become a bigger burden on taxpayers than Social Security.

And since our goal should be to minimize the long-run burden of government spending, that suggests that it’s more important to reform the healthcare entitlements.

But which program should be fixed first?

There’s certainly a strong case to deal with Medicare. The health program for the elderly already is very expensive and it’s going to become even more of a budget buster because of demographic changes.

Moreover, shifting to a “premium support” system would be good for seniors since they would have the ability to pick a plan best suited to their needs. Basically the same type of system now available to members of Congress.

All things considered, though, I would deal first with Medicaid. There are three reasons why I would target the health program designed to supposedly help the poor?

1. Medicaid is hugely expensive today and will become even more costly over time.
2. The block-grant reform proposal is a good first step for restoring federalism.
3. Obamacare can be partly repealed by block-granting the exchange subsidies as part of Medicaid reform.

For more information, here’s my video explaining how to reform the program.

I’m not going to cry – or even complain – if politicians instead decide to fix Medicare or Social Security. Just so long as they’re taking steps in the right direction, I’ll be happy.

What I don’t want to see, however, is a gimmicky plan such as Simpson-Bowles that merely papers over the underlying problems for a couple of years. The wrong type of entitlement reform is probably worse than doing nothing.

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Maybe It Is Possible to Reform Health Entitlements

I’m never guilty of being an optimist, but two items caught my attention today that suggest the tide may be turning on entitlement reform.

We’ll start with something from the New York Times.

Regular readers know that I’ve criticized that paper on a few occasions.

Sometimes it’s because of silly editorializing, such as this bit of amateur political analysis by Thomas Friedman, this foolish look at international taxation by the editors, and this laughable column arguing that America should copy Italy’s fiscal policy.

I also hit them for ignorant reporting, such as the story implying that things are free when they’re financed by government, this column that inadvertently makes the opposite point from what was intended, and this story mis-characterizing tax reform.

Paul Krugman, needless to say, is in a league of his own. I’ll just cite this beatdown about Estonia and leave it at that.

But it’s also important to cite good journalism when it occurs, and a new story in the New York Times on healthcare is a prime example. It’s straightforward and unbiased. And it shows the benefits of even small steps in the direction of markets. Here’s some of what Robert Pear wrote.

Even as President Obama accuses Mitt Romney and Representative Paul D. Ryan of trying to privatize and “voucherize” Medicare, his administration crows about the success of private health plans in delivering prescription drug benefits and other services to Medicare beneficiaries. More than a quarter of the 50 million beneficiaries receive coverage through private Medicare Advantage plans, mostly health maintenance organizations, and Medicare’s drug benefits are delivered exclusively by private insurers, subsidized by the government. …“Medicare Advantage premiums down 7 percent on average, enrollment up 10 percent,” the administration announced in February, and it said the quality of care under Medicare Advantage was improving. This month the administration reported the results of competitive bidding for 2013: “Medicare prescription drug premiums to remain steady for third straight year.” Federal spending on Medicare drug benefits has been about 30 percent lower than the Congressional Budget Office predicted when the drug legislation was passed in 2003. Mr. Ryan, a Wisconsin Republican who is the chairman of the House Budget Committee, said the drug program “came in below cost projections because it harnessed the power of choice and competition.”

Pear’s article raises an interesting issue about incremental reform. Proponents of liberty and markets obviously don’t like government-financed healthcare, but there are very-bad ways of doing the wrong thing and there are less-bad ways of doing the wrong thing.

That’s never an argument for doing something bad, but if bad policies already are implemented, then it does make sense to grab any opportunity to make those policies less destructive.

Ideally, we should restore free markets overnight. But given the constraints of the political system, I’ll gladly take the modest reforms that Paul Ryan is proposing for Medicare and Medicaid.

Here’s a back-on-the-envelope image I created to show the spectrum of healthcare policy. It’s obviously very simplified, but I think the overall point about Ryan’s reforms being very incremental is correct.

One final point about the political implications. President Obama clearly wants to scare seniors into thinking that the Ryan reforms are radical, but this is why the New York Times article is significant. It shows that Ryan isn’t proposing anything unusual, and it shows that the incremental reforms being proposed have a successful track record.

This may be why we’re now seeing some remarkable poll results.

Despite a furious onslaught of negative ads and harsh rhetoric, neither President Obama nor Mitt Romney has much of an advantage on critical issues heading into the fall campaign. …On Medicare — long considered a political vulnerability for Romney and his running-mate Paul Ryan — 49 percent of likely voters say Obama would handle the issue better while 48 percent prefer Romney. On health care, voters are just as divided — with 49 percent favoring Obama’s policies and 48 percent favoring Romney.

P.S. Since I’m favorably commenting on an article from the New York Times, allow me to remind you that the paper does publish good material every so often. They allowed this great column on tax sovereignty on their editorial pages, this powerful expose of IRS abuse by a business columnist, and this great graphic on the connection between big banks and government bailouts in Europe.

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Deroy Murdock Explains How to Promote Paul Ryan’s Proposed Medicare Reform

When I give speeches about entitlement reform, I often make the point that there’s nothing radical about Paul Ryan’s plan to reform Medicare.

Spending will go up, for instance, not down. And the reforms only affect people under age 55. This is evolutionary change, not revolutionary change.

But my main example is that future seniors, for all intents and purposes, will have a health plan similar to what’s now available for Members of Congress. Not only the politicians, but also their staff and the entire federal bureaucracy.

I’m not the only one to think this is a powerful point. Here are a couple of passages from Deroy Murdock’s National Review column on the topic.

The Medicare-reform proposal of presumptive GOP running-mate Paul Ryan is precisely as extreme as the health plan available today to every member of Congress. Ryan envisions average seniors’ being able to enjoy Capitol Hill–style medical options. This itself, however, would be a choice. Seniors who oppose choice in health coverage will be 100 percent welcome to remain within traditional Medicare. …Wyden-Ryan mirrors the way federal legislators buy health insurance. As FactCheck.org’s Brooks Jackson notes, “House and Senate members are allowed to purchase private health insurance offered through the Federal Employees Health Benefits Program, which covers more than 8 million other federal employees, retirees and their families.” …As FactCheck.org, elaborates, “All plans cover hospital, surgical and physician services, and mental health services, prescription drugs and ‘catastrophic’ coverage against very large medical expenses . . . There are no exclusions for preexisting conditions.” Participants may change plans during annual “open season” periods. Also, the government pays 72 percent of the average worker’s premium, with a maximum of 75 percent. Democrats cannot explain why Medicare recipients need to become congressmen to enjoy such choices in health coverage. If Ryancare, in essence, is good enough for senior citizens like Nancy Pelosi and Harry Reid, it’s good enough for any senior who wants it after 2022.

Deroy’s column shows how supporters of entitlement reform can counter some of the left’s demagoguery.

He’s making a point about political salesmanship, but it’s also important to understand why Medicare modernization is good healthcare policy.

Simply stated, the main healthcare problem in America is the third-party payer crisis. As explained in this video, markets are dysfunctional when government programs and other forms of intervention create a system where 89 cents out of every healthcare dollar is paid for by somebody other than the consumer.

Ryan’s Medicare reform doesn’t directly address this problem, just as block-granting Medicaid and reforming the tax system don’t automatically restore a market-based approach.

But if a sufficient share of future seniors use their premium support vouchers to buy high-deductible catastrophic insurance policies (which presumably will be the smart approach), then a growing share of routine medical expenses will be purchased directly by consumers – thus slowly but surely returning market forces to healthcare.

So I fully agree with Deroy that there are smart ways to promote the Ryan Medicare reforms. But I also want people to understand what it is that we want to accomplish.

I elaborate in my video on Congressman Ryan’s proposed Medicare reform.

Last but not least, check out this chart and you’ll begin to understand the potential benefits of fixing the third-party payer problem.

P.S. The current version of the Ryan plan, now known as Ryan-Wyden, is not as good as the original version because it keeps the current Medicare system as an option.

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Romney’s Disingenuous Mediscare Attack

Republicans are despicable people.

Some of you may be wondering why I would say such a thing. After all, I periodically express my profound admiration for Ronald Reagan (as well as my appreciation for the only other good President of the past 100-plus years).

Moreover, I just wrote a Wall Street Journal editorial saying nice things about the Ryan budget.  And I also have done a couple of TV interviews explaining how that plan would do a good job of controlling the burden of government spending.

But these are the exceptions. What really matters is what Republicans do when they actually hold power. By that standard, most GOPers are terrible.

Bush was a reckless big spender, for instance, and I’ve compiled a list of examples that make me think Romney would be equally disappointing.

And now I have something new for my list of Romney transgressions. Take a look at this awful campaign commercial.

Several things about this commercial make me nauseous.

• First, current seniors did not pay for Medicare. The Medicare payroll tax only covers about one-third of projected costs. To be fair, the ad doesn’t claim that seniors completely self-financed their benefits, but it clearly promotes the entitlement mindset – particularly with the nonsense about “guaranteed healthcare.”
• Second, while I agree that Obamacare is a “massive new government program,” it’s downright pathetic to run an ad defending an even more massive old government program.
• Third, Obama did not cut Medicare. He merely reduced the program’s rate of growth. Republicans correctly complain when leftists demagogue about non-existent spending cuts, but they lose all credibility when they use the same dishonest tactics.

You might be thinking that Romney was out of the loop when some campaign consultants went rogue and put together a deeply flawed commercial.

Don’t kid yourself. Here’s what Romney just said, as reported by the L.A. Times.

At a campaign fundraiser in Charlotte on Wednesday, Romney told NASCAR team owners and other donors that Obama “cut Medicare funding for current Medicare retirees” to pay for his healthcare overhaul. “That came out of the Medicare trust fund,” Romney told supporters at Duke Mansion, a colonial-style banquet hall. “He raided that trust fund to pay for Obamacare. And as seniors hear this, they’re going to be angry.” …Restoring the cuts, as Romney advocated Wednesday in a CBS interview, would swell the federal deficit in kind. Romney, who has named deficit reduction as a top priority, said nothing about how he would cover the expense.

In other words, Romney not only is criticizing Obama for restraining the growth of Medicare spending, he’s also promising to increase outlays on the program if he gets to the White House.

By the way, none of this should be interpreted as an endorsement of what Obama did. As you can see from these two charts (from Medicare’s Chief Actuary), the reductions in the rate of growth of Medicare spending basically were used to finance higher spending in other areas such as Medicaid.

But Romney’s basically promising to do nothing more than reverse these two charts. And that’s assuming we can trust his campaign promise to undo Obamacare. This cartoon shows why I’m not going to hold my breath waiting for that to happen.

I don’t care whether politicians are Republicans or Democrats. I care whether they are going to increase economic freedom so that we can enjoy more liberty and prosperity.

Based on his approach to Medicare, Romney at best wants to rearrange the deck chairs on the Titanic.

If Romney actually cared about taxpayers and the economy, he would promise to repeal the costly Obamacare program and then build upon that small first step with a commitment to reform the other unaffordable entitlement programs.

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Does It Matter that Paul Ryan Is on the GOP Ticket?

The honest answer is that it probably means nothing. I don’t think there’s been an election in my lifetime that was impacted by the second person on a presidential ticket.

And a quick look at Intrade.com shows that Ryan’s selection hasn’t (at least yet) moved the needle. Obama is still in the high 50s.

Moreover, the person who becomes Vice President usually plays only a minor role in Administration policy.

With those caveats out of the way, the Ryan pick is mostly good news.

Here are the reasons why I’m happy.

• I think Ryan genuinely believes in small government, low tax rates, and free markets. Heck, he’s even read Ayn Rand, and is willing to admit that he likes her writings.
• Ryan put together a good budget and got the Republican Party to rally around the plan – a remarkable achievement considering that the same GOPers had just spent 8 years supporting the irresponsible fiscal policies of the Bush Administration.
• He understands that not all entitlement reform is created equal. Instead of supporting means-testing (which produces implicit higher marginal tax rates) and unsustainable price controls, Ryan got his colleagues to support Medicaid block grants and premium support (or vouchers) for Medicare.
• Ryan is a proponent of the flat tax and can competently discuss not only the importance of low tax rates, but also why double taxation is misguided and why it’s wrong to use the tax code to pick winners and losers.

Here are two reasons why I’m worried.

• Both Romney and Ryan are somewhat sympathetic to a value-added tax. My worst-case scenario is they win the election, but then can’t get a good budget approved because of some squishy Republican senators who put self interest above national interest. Romney and Ryan then decide that this European-style national sales tax is the only way – on paper – of making the budget balance. In reality, of course, we’ll suffer the same fate as Europe since the VAT revenues will be used to finance ever-larger government.
• Ryan has some very bad votes in his past, including support for TARP, the auto bailout, the no-bureaucrat-left-behind education legislation, and the reckless Medicare prescription drug entitlement. Everyone says to ignore those votes because Ryan knew he was voting the wrong way, but if he’s already made some deliberately bad decisions for political reasons, what’s to stop him from making more deliberately bad decisions for political reasons?

But as I said above, don’t read too much into Ryan’s selection. if Republicans win, Romney will be the one calling the shots.

Though this does give Ryan a big advantage the next time there’s an open contest for the GOP nomination – either 2016 or 2020.

P.S. I suspect putting Ryan on the ticket will shift Wisconsin into the GOP column. Based on my last prediction, that would be enough to defeat Obama. But I’ll have to contemplate whether the pick hurts Romney’s chances in another state. You’ll have to wait until September 6 for my updated election prediction.

P.P.S. For those who care about politics, some are saying that selecting Ryan was risky because it gives Obama and his allies an opportunity to demagogue the GOP ticket about entitlement reform. I disagree. Even if Romney picked Nancy Pelosi, that demagoguery was going to happen. Heck, they’ve already accused Romney of causing a woman’s death, so I hardly think they’ll be bashful about throwing around other accusations.

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Two Big Mistakes Journalists Make When Writing about Social Security’s Dismal Finances

The Social Security Board just released its Trustee’s Report, and it’s generated the usual hand wringing about the program’s long-term demise – much of which is perfectly appropriate for reasons I’ve already discussed.

But I’m usually unhappy about the press treatment of this issue.

Here’s some of what Stephen Ohlemacher and Ricardo Alonso-Zaldivar wrote for the Associated Press.

Social Security is rushing even faster toward insolvency, driven by retiring baby boomers, a weak economy and politicians’ reluctance to take painful action to fix the huge retirement and disability program. The trust funds that support Social Security will run dry in 2033 – three years earlier than previously projected – the government said Monday. …Unless Congress acts – and forcefully – payments to millions of Americans could be cut. …Potential options to reduce Social Security costs include raising the full retirement age, which already is being gradually increased to 67, reducing annual benefit increases and limiting benefits for wealthier Americans. Policymakers could also increase the amount of wages that are subject to Social Security taxes. Social Security is financed by a 6.2 percent tax on the first $110,100 in workers’ wages. It is paid by both employers and workers.

There are two flaws with what’s written in this story. One is a sin of commission, failing to expose the government’s dishonest accounting. The other is a sin of omission, analyzing the issue solely through the lens of government finances.

1. The sin of commission is that the story assumes the Social Security Trust Fund is real, when it is nothing but a collection of IOUs. When extra Social Security taxes are collected, the Treasury keeps those monies and spends them on other programs. In exchange, it engages in a bookkeeping exercise and credits the Social Security Trust Fund with some government bonds.

When one part of the government owes another part of the government some money, it is a wash. There’s no pile of assets to finance benefits. Those bonds simply represent a claim on future taxpayers.

This is why politicians can play dishonest games, such as approving a payroll tax holiday and declaring – by waving a magic wand – that this won’t affect the amount of IOUs in the Trust Fund. Just in case you think I’m joking, the AP story notes that “Congress temporarily reduced the tax on workers to 4.2 percent for 2011 and 2012, though the program’s finances are being made whole through increased government borrowing.”

Needless to say, that’s phoniness on top of phoniness. I guess the next step is for politicians to enact legislation adding several zeroes to all the existing IOUs. They can then declare that Social Security is solvent. Problem solved…other than the itsy-bitsy problem that there’s still no money.

2. The sin of omission in the story is that it focuses on the government’s finances and overlooks the implications for households. It is possible, at least on paper, to “save” Social Security by cutting benefits and raising taxes. But such “reforms” force people to pay more and get less – even though Social Security already is a very bad deal, particularly for younger workers.

My video on Social Security reform explains that personal retirement accounts are the only way to simultaneously deal with government finances and household finances in a constructive fashion.

Sadly, neither Obama nor Romney seem interested in this type of pro-growth reform.

By the way, I don’t mean to pick on the Associated Press. The report excerpted above simply happened to be the first one I read. You ‘ll find the same myopic analysis in the Wall Street Journal and Bloomberg, to cite just two of many examples.

In closing, Social Security reform is actually the least important of the entitlement reforms. The long-term fiscal problems caused by Medicare and Medicaid are much larger. This three-part video series looks at the reforms that could address all three programs.

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Congressman Ryan’s Budget Restrains Spending Growth, Allows Private Sector to Expand Faster than Burden of Government

The Chairman of the House Budget Committee has produced a new budget plan which contrasts very favorably with the tax-heavy, big-spending proposal submitted by the President last month.

Perhaps most important, Congressman Ryan’s plan restrains spending growth, allowing the private sector to grow faster than the burden of government, thus satisfying Mitchell’s Golden Rule so that spending falls as a share of GDP.

The most important detail in the proposal is that the federal budget, which currently consumes 24 percent of GDP, would fall to less than 20 percent of GDP beginning in 2016.

That’s the good news. There are three pieces of not-so-good news.

1. Ryan’s plan allows spending to grow by an average of 3.1 percent annually over the next 10 years, with is faster than the 2.8 percent average annual growth in last year’s budget.

2. His proposed Medicare reform, while far better than current law, also is not as good as what was proposed last year.

3. The federal budget would still consume a greater share of the economy’s output than it did when Bill Clinton left office.

I suppose it’s also worth mentioning that Ryan’s proposal isn’t as good as Rand Paul’s budget. Spending only climbs 2.2 percent yearly under the plan put together by the Kentucky Senator, and he also abolishes several useless cabinet-level departments.

But the very good shouldn’t be the enemy of the good. As noted already, Congressman Ryan’s plan meets the most important test, which is restraining spending so that the federal budget grows slower than the private economy. And, as the chart shows, he obviously imposes more fiscal restrain then President Obama.

Regular readers know that I generally show no mercy to jelly-spined Republicans, but I praised GOPers for approving last year’s Ryan budget. The same will be true if they approve this year’s version.

P.S. I am frustrated and nauseated by all the people who are fixating on whether Congressman Ryan’s plan balances the budget in 10 years, 20 years, or whenever. What matters is shrinking the burden of government. I hereby bestow the Bob Dole Award on all the people who are mistakenly focusing on the symptom of red ink rather than the underlying disease of bloated government.

P.P.S. I’m happy to report that there is no value-added tax in the revenue portion of Congressman Ryan’s budget. There is a VAT in his Roadmap plan, and I endlessly worry that this poison pill will re-emerge and ruin other good fiscal plans put forth by the Wisconsin lawmaker.

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Penile Moments in Government Waste

It’s not often that I get to use the word “penis” on a public policy blog. But with my juvenile sense of humor, I exploit such opportunities whenever they arise.

• I wrote about an unfortunate guy who had his you-know-what amputated thanks to the incompetence of Sweden’s government-run health care system.
• I commented on the nanny-state mentality behind a campaign to ban circumcisions in San Francisco.
• I posted three wretched examples of welfare state waste, including the fact that Uncle Sam has spent about a quarter-billion dollars on penis pumps in the past decade.

And I also managed to produce a couple of posts with the word “penile.”

• I noted that European taxpayers were paying to provide politicians and bureaucrats in Brussels with coverage for penile implants.
• I expressed amazement that the U.K. government decided it is a human right to have taxpayer-financed sex trips to Amsterdam.

These are such good examples that you may be wondering what I could do for an encore.

Well, when the federal government spends about $4 trillion per year, much of it pissed away (pun intended) on useless and counterproductive programs, it’s just a matter of time before we find another example.

In this instance, we return to the world of taxpayer-financed penis pumps. Here are the relevant parts of an AP report.

An Illinois man was sentenced Friday by a federal judge in Rhode Island to more than three years in prison for shipping unwanted penis enlargers to diabetes patients as part of a larger fraud scheme that prosecutors say bilked $2.2 million from Medicare over four years. …Winner purchased penis enlargers for an average of $26 each from online sex shops and then repackaged and shipped them to patients… Winner targeted Medicare beneficiaries…and persuaded patients to provide their Medicare information by offering free medical equipment and supplies, prosecutors said. …Winner then charged Medicare an average of $284 each for a total of $370,305, authorities said.

I cite this story not because I’m shocked that somebody bilked the government, but rather because it should irritate all taxpayers that it takes so long for the bureaucrats to figure out what’s happening.

My credit card company periodically will block my account, especially when I’m traveling, because of unusual transactions. But the federal government will blindly reimburse fraudsters for years.

The most powerful part of the story, though, is the way that Mr. Winner justified his crimes.

When employees confronted Winner about sending out supplies regardless of need, authorities allege he responded: “It doesn’t cost the client anything as the government is paying for it, and that the government would just print more money, so order more.”

He managed to combine the ills of third-party payer, government dependency, fiscal profligacy, and irresponsible monetary policy in one sentence.

This guy belongs in Washington. Heck, he’s qualified to be a member of the Obama cabinet!

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Two Early Thoughts on the Ryan-Wyden Medicare Plan

It’s obviously quite disappointing that Congressman Paul Ryan has teamed up with Senator Ron Wyden, a Democratic from Oregon, to put forth a significantly watered down version of his Medicare reform plan.

Ben Domenech of the Heartland Institute and Peter Suderman of Reason have good summaries of why the new plan is a less-than-exciting development.

I’m not happy, but I’m not surprised. Having read a lot of the commentary flowing back and forth today, I have two initial observations.

1. Blame Romney and Gingrich. Republican House members are very nervous about getting demagogued during next year’s election because of their courageous vote this year for the Ryan budget. And since the two frontrunners for the GOP nomination are very squishy on the issue (and likely to become even worse once one of them gets the nomination), this leaves House GOPers in a risky position.

2. Ryan-Wyden may be “Obamacare for Seniors,” but that’s still better than the current system, which is sort of a “UK-single-payer-for-seniors” plan. In other words, Ryan-Wyden isn’t a good plan, but it’s not as bad as the current system. It would be a small step in the right direction. But it’s hard to get excited about a small step when lawmakers earlier this year voted for a big step.

But here’s the problem. America needs leadership to make the changes that are necessary to save the U.S. from a Greek-style fiscal crisis. Given the weak set of candidates running for President, I can understand why Ryan and other congressional Republicans are trimming their sails. But that doesn’t change the fact that America needs something bolder.

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