StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

The "Do Nothing" Solution to America's Fiscal Crisis

23 Nov 2011
Posted by Bruce Bartlett
I published this article in yesterday's Financial Times. BB
To many the budgetary gridlock in the US may appear as intractable as that in Europe. But the reality is that the American situation is vastly more favourable. The reason is that  Congress has already passed laws sufficient to permanently fix its budgetary problem and put the nation’s finances on a stable path. All that is necessary is to do nothing and to let the laws on the books take effect.
As is well-known, America’s most serious budgetary problem is Medicare, the national health programme for the elderly. Its spending has been growing faster than the economy for years, a key reason why total US health spending as a share of gross domestic product is double that of countries such as the UK.
Back in 1997 Republicans and Democrats joined together to implement a programme that would permanently restrain the growth of Medicare spending. The key provision limited payments to doctors to those established by a formula called “the sustainable growth rate”.
The SGR formula worked fine for a few years, but as soon as it began to bite in 2003, Congress intervened to prevent doctors’ fees from being cut. It has continued to do so every year since. This annual exercise is known in Washington as the “doc-fix”.
But the original law remains in force. If it were simply allowed to take effect without congressional interference, payment to doctors for Medicare services would be cut by 30 per cent on January 1. That is not likely to happen. But if Congress would just rebase the SGR formula to this year, and allow it to operate from now on, it would save about $300bn over the next 10 years, plus another $50bn in debt service.
On the revenue side, a large number of tax cuts enacted since 2001 are scheduled to expire at the end of this year and next year. There is also a tax provision called “the alternative minimum tax” that has also been subject to an annual congressional fix to keep it from affecting too many taxpayers.
The largest of the expiring tax cuts are those enacted in 2001 and 2003 that cut the top income tax rate from 39.6 per cent to 35 per cent and reduced the rate on dividends and capital gains to just 15 per cent, among other things. These were previously scheduled to expire at the end of 2010, but at the last minute Barack Obama agreed to extend them for two years.
The so-called Bush tax cuts are now scheduled to expire at the end of next year. The Congressional Budget Office estimates that allowing them to expire on schedule, as well as foregoing another minimum tax fix, will raise revenues by almost $4,000bn through to 2021, plus saving almost $700bn in debt service.
Finally, there are $1,200bn in cuts for discretionary spending programmes, including national security, which will take effect automatically unless Congress comes up with a different deficit reduction package of equal size. A special congressional committee has been working for six weeks to come up with such a package by November 23.
On Monday, the joint select committee on deficit reduction announced that it could not agree on a viable alternative, thus leaving in place a $1,200bn spending cut beginning in 2013.
Thus we see that laws already in force would reduce projected deficits by approximately $5,500bn over the next 10 years, plus another $1,000bn in debt service savings. This is not enough to balance the budget, but it is sufficient to stabilise the debt-to-GDP ratio at its current level of about 60 per cent.
The problem, of course, is that neither Congress nor the White House has shown any inclination to allow the laws on the books to take effect. There are reasonable concerns about allowing a large fiscal contraction to take effect when the economy is still fragile, and it is not hard to come up with better ways of reducing the deficit than those now scheduled to take effect.
But the main constraint is politics. With the big scheduled spending cuts and tax increases taking effect in 2013, neither party is anxious to promise specific austerity measures going into next year’s presidential election. Everyone hopes their hand will be strengthened by voters and the burden of fiscal adjustment can be shifted elsewhere.
The fact remains that no new laws are needed to get the US on a stable fiscal course. At least as a political matter, this suggests that the prospects for deficit reduction are better in the US than Europe, where legislation still needs to be enacted to get debt under control.
High quality global journalism requires investment.

The writer was a Treasury department and White House official in the Ronald Reagan and George H.W. Bush administrations. His book on tax reform, ‘The Benefit and the Burden’, will be published in January.

Medicare is not the problem

I appreciate the general sentiment in this article but the part about Medicare is just misleading. Medicare is not the reason health care costs in the U.S. are twice the rest of the world, private insurance is. Medicare has lower administrative costs than private insurers and its costs have risen more slowly than the cost of private insurance when factoring in the age of the recipients. We could lower health care spending in the U.S. (public and private) dramatically by making a Medicare-for-all system similar to what the rest of the world has.

As I have pointed out numerous times, we spend about $7500 per person per year on a jumbled and inefficient private/public health care amalgam while the rest of the world spends about $4000 or less on single-payer type plans. This comes out to an extra $1 trillion dollars per year to have the freedom to be uninsured or buried in paperwork. Any serious effort to balance the budget would look at this first.

It would look at our bloated military budget (~$2,000 per person per year when factoring in all costs) second. Between health care and the military we spend $46,000 per year per family of four, that is almost the entire median family income. Every other country spends less than half that amount. How can we possibly be competitive when we waste $23,000 per family each year?

Insurance not the principal problem

While it's true that Medicare is not the reason why our healthcare system costs twice as much as anyone elses it's not principally the fault of the insurance industry either. The real problem is that we have a healthcare delivery system that is incentivised to drive up costs. This is why doctors are earning 2-3 times as much as their counterparts in Europe and a Cat scan costs nearly ten times what it does in Japan. The vast efforts of the insurance industry to lay off costs and it's obligation to be profitable is certainly a contributory factor to our expensive system but it's only a part of the problem and the lesser part.

The healthcare system is not

The healthcare system is not "incentivized to drive up costs" - rather, the legal framework surrounding healthcare requires massive numbers of extra tests be performed when compared to every other country in the world. Tort reform is therefore defined to be removing the liability that's put directly on the MD. Quite literally 1/3 of the current testing is simply CYA by the doctor to eliminate things that are extremely rare events.. but you can't just say "cut the test" unless you also eliminate the liability.

Doctors are earning 2-3 times the counterparts in Europe because of the costs embedded in the US system prior to being a doctor -- in Europe the state pays for education while in the US the banks jam $300k of nondischargeable student debt (plus fees!) down the gullet of the fatted calf - excuse me, doctor. If you want to decrease the pay of doctors, you have to eliminate the debt.

Rationing of care already exists -- it's simply done by private insurance, and that's what Rethuglicans want to protect.. they want to steal your premiums and provide no care. Or, the business phrase is "lay off costs."

It's like a Matryoshka of

It's like a Matryoshka of problems!

"THIS is not the TRUE doll, there's another, even smaller doll inside it!"

(And oddly enough, that doll happens to look exactly like whatever my pet political issue happens to be!)

The debt to GDP ratio is 100%

The debt to GDP ratio is 100% -- not 60%. Unless of course you are admitting that the Social Security "trust fund" is a complete fraud and contains nothing.

And debt to GDP ratio is a garbage statistic anyway. The appropriate measure is debt to revenue. That is the measure that, when it gets to an unsustainable point in a democracy, tells you when a government is going to have to do something very very unpopular -- and hence will screw things up and create a crisis. And on that measure the US (at 300% debt to revenue) is in worse shape than Italy/Ireland/Portugal -- though not as bad as Greece/Japan.

The only reason the US hasn't faced the Greece/Italy funding crisis is because we, for now, have foreigners demanding the dollar as a reserve currency. When that does change, there will be no warning and it will happen so fast it will obliterate the US economy.

The $2.5 trillion in

The $2.5 trillion in treasuries in the SS fund is already included in the overall federal debt numbers. There's no difference in debt obligation for the general fund regardless of market vs non market treasuries. Don't let the politicians lie to you.

The general fund needs to issue marketable securities for what was borrowed and put the cash back in the SS trust, invest the surpluses in something with a better return but still safe, and take SS off the general budget.

SS ran an annual surplus every year from 83 to 09. SS is easy to fix with just a few tweaks. remove the cap on the employees side and fix disability.

The idea that SS is broke is a lie.


"And debt to GDP ratio is a garbage statistic anyway."

Time to go back to World Net Daily, HotAir, and Goldline coin buying, please. Just remember if you bury your ammunition in the yard, remember where it is.

"But the main constraint is

"But the main constraint is politics."

You seem to be implying that a political constraint is somehow less real--and therefore easier to overcome--than other sorts of constraints. The fact remains that American politics is *extremely* polarized right now by historical standards, and there is little prospect that anything faster than a continued demographic shift away from old white suburban racists is going to change it.

Primed for lobbying rents

Yes, but the American system is well oiled for buying the ongoing deferrals on all of those plans.

Suggest a starting point for each of those automatic fixes is to reset their basees to current time - do that in another bill as a technical fix that won't have any impact on budgets, except for wiping away the charades applied in every budgeting exercise that those whomping big adjustments will ever be allowed to happen. After doing that, it would be possible to apply some of them.

Some caveats for each one, but do them all at the same time and blow away the lobbiests and any legislators that try to intervene.

As I noted a couple days ago, we do want to get into a state where gridlock will mean that plans on autopilot tend towards self-correction. The current yawning gaps between laws on the books and what we'd allow to happen are too big to let gridlock work in favor of self-correction.

RollingStone Article

The RolliingStone quotes you a bunch in this recent article. Do those guys have the facts correct? Obviously, some of it is a bit over the top. It reads like you and Mr Norquist do not see eye to eye. I would be interested on your comments of their story.

"Tax receipts as a percent of the total economy have fallen to levels not seen since before the Korean War – nearly 20 percent below the historical average. "Taxes are ridiculously low!" says Bruce Bartlett, an architect of Reagan's 1981 tax cut. "And yet the mantra of the Republican Party is 'Tax cuts raise growth.' So – where's the &(%&(@ growth?"

In retrospect, the true victor of the midterm elections last year was not the Tea Party, or even Speaker of the House John Boehner. It was Grover Norquist.

"What has happened over the last two years is that Grover now has soldiers in the field," says Bartlett, the architect of the Reagan tax cuts. "These Tea Party people, in effect, take their orders from him." Indeed, a record 98 percent of House Republicans have now signed Norquist's anti-tax pledge-""

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