Deluged With Budgets, Overwhelmed With Questions

by Dave Schuler on April 15, 2011

As the federal budget plan for 2011, already months late, finally passes the House of Representatives on its way to the Senate from whence it will be signed by the president, roughly six months late, we already seem to be deluged with proposals for the 2012 budget.

There’s the Ryan plan, the “People’s Budget” produced by the Congressional Progressive Caucus, the “Gang of Six” plan produced by Democratic and Republican senators, and now President Obama’s plan. Paul Krugman characterizes them aptly in his column:

For the contrast between Mr. Ryan last week and Mr. Obama on Wednesday wasn’t just about visions of society. There was also a difference in visions of how the world works.

Indeed there were and I found them visions that varied from mistaken to delusional to demagogic. But it likely explains why the 2011 budget was so late: there are conflicting and irreconcilable visions of how the world works and all parties finally came together on the single point they could agree on (getting re-elected).

A couple of digressions. First, I think that Dr. Krugman in using the phrase “call Mr. Ryan’s bluff” is wrong. I don’t believe that Mr. Ryan is bluffing and Dr. Krugman has produced no evidence that he is. I think the phrase he’s looking for is either “call Mr. Ryan’s bet” or, even better, “upping the ante”. Second, is President Obama’s budget really serious? I’m skeptical. To see what I mean let’s use the example Dr. Krugman does: Medicare Part D. We’re currently spending about $50 billion per year on it. Using Dr. Krugman’s numbers if we were to save 40% of that it would save about $20 billion per year. While that’s a start when we’re borrowing anything from a half trillion to a trillion per year it’s a drop in the bucket. Total Medicare spending is expected to grow at the rate of 7.5% a year over the next ten years or so. $20 billion sounds like a lot but it’s just a fraction of the amount by which Medicare is expected to grow.

My second digression is on “The People’s Budget”. Could any naming be less felicitous? Not only does it bring to mind The People’s Republic of China and other communist states it would appear to be a direct reference to Lloyd George’s 1909 People’s Budget, a budget that increased Britain’s welfare state by a substantial increase in taxes. It lost the Liberal Party seats in Parliament, took more than a year to pass, and only passed after the land tax was removed.

I am overwhelmed with questions about these budgets. First, Paul Ryan and the Republicans in Congress. The tax cuts of the early years of the Bush presidency did very little to stimulate the economy: mostly, they were saved. Why would a return to the rates that prevailed under Clinton be economically harmful? The cuts weren’t economically beneficial. And should military spending really be exempt from budget cutting? It’s the largest item of discretionary spending and I find it incredible that there’s nothing from it that can be spared.

Next, the Progressive Caucus. Have you never heard of deadweight loss? Can you really believe that a 49% maximum tax rate will not result in less economic activity? How many jobs are you willing to sacrifice to a war on the wealthy? And why not propose a wealth tax and attack the enemy’s front line?

To President Obama. How can you restrict tax increases to those making over $250,000, expand the use of our military, and exempt two-thirds of the budget (Medicare and Social Security) from cuts? Details, please.

Finally, some assertions.

  1. We cannot continue to borrow a half trillion or more per year without repercussions. That’s not just too much relative to U. S. GDP, that’s too much relative to world GDP.
  2. Medicare costs cannot be allowed to grow indefinitely at three times the non-healthcare rate of inflation. No foreseeable level of tax increases will produce that much revenue and the consequences for the economy, already being felt, will be disastrous.
  3. No advisory board will be able to control Medicare costs, no advisory board can, and anybody familiar with modern views of planning can possibly believe that they can. You are dealing with intelligent actors. For every action taken by an advisory board there will be counter-moves.
  4. “Medicare as we know it” is doomed by the laws of arithmetic. There will be cuts to benefits. Deeming that reality as “cruel” is either delusional or political posturing, not serious.

{ 23 comments… read them below or add one }

Andy April 15, 2011 at 8:44 am

Great post, Dave, you’ve summed up my own sentiments well.

steve April 15, 2011 at 10:01 am

“No advisory board will be able to control Medicare costs, no advisory board can, and anybody familiar with modern views of planning can possibly believe that they can. You are dealing with intelligent actors. For every action taken by an advisory board there will be counter-moves.”

Actually, an advisory board could come up with plans to cut Medicare. The problem lies in the political will to carry out the plan. I assume this is what you mean. If that is the case, then Ryan’s plan has the same deficit. voucher values can be raised, and probably will.

“Medicare as we know it” is doomed by the laws of arithmetic. There will be cuts to benefits. Deeming that reality as “cruel” is either delusional or political posturing, not serious.”

Which brings up the important question of how we make cuts. I would prefer that this be research based when possible. When we know that treatments are not cost effective, we should not pay for them.

Steve

Steve Verdon April 15, 2011 at 10:25 am

Second, is President Obama’s budget really serious? I’m skeptical.

You know, I took the same position over at OTB and John Persona thought that meant I was against things like cutting Medicare/Medicaid costs and letting the tax cuts expire for those making over $250,000/year. The guy has to be one of the dumbest people I’ve run across on the internet.

But that being said, totally agree with you Dave. I think Obama really, really wants the tax increase, but cutting Medicare/Medicaid? No. Or even if he really does mean it, he wont do it because no matter how it will work it will look bad. Even if he can come up with a miracle to keep the retired just as well off health care wise while cutting costs it will look bad politically. So in the end he’ll puss out. He’ll puss out because he’ll know (or be informed) that his own party will neuter him as President if he tries it because even if he gets past the next election those members of his party in Congress will still want to get re-elected and they know this kind of talk will not work in attaining that goal.

Using Dr. Krugman’s numbers if we were to save 40% of that it would save about $20 billion per year. While that’s a start when we’re borrowing anything from a half trillion to a trillion per year it’s a drop in the bucket. Total Medicare spending is expected to grow at the rate of 7.5% a year over the next ten years or so. $20 billion sounds like a lot but it’s just a fraction of the amount by which Medicare is expected to grow.

Rough back of the envelope (actually simple Excel work) says the following:

For 10 years Medicare part D will cost: $629 billion.
Saving 40% each year: $252 billion.

Not bad, but Medicare spending in 2009 was $484 billion. Now, using that as our starting point and using the 7.5% and subtracting off 2.5% for inflation (i.e. real growth in Medicare spending is 5%/year) then Medicare spending will be:

$6,088 without any savings for part D, or
$5,836 with savings.

Note these numbers are the sum of 10 years. That is about a 4.1% savings. Not bad, but not enough. Because overall real growth for Medicare is still…wait for it….5%. That is this kind of savings is a shift downwards in the cost curve. Does it help? Sure. Does it “solve the problem”? Hell no. And this is making the heroic assumption we can save 40% on Medicare part D year in year out. Perhaps this simple simulation will give an idea of the huge f**king problem we are facing.

Steve Verdon April 15, 2011 at 10:26 am

Oh and the link to where I got the total dollars for Medicare is a href-=”http://www.kff.org/medicare/upload/7305-04-2.pdf”>here.

Steve Verdon April 15, 2011 at 10:26 am

Dammit blew the html, but you can copy and paste the link if necessary.

Icepick April 15, 2011 at 11:47 am

Indeed there were and I found them visions that varied from mistaken to delusional to demagogic. But it likely explains why the 2011 budget was so late: there are conflicting and irreconcilable visions of how the world works and all parties finally came together on the single point they could agree on (getting re-elected).

I’ve got to disagree with this characterization of why the 2011 budget didn’t get passed. The Democratic Party controlled the House, Senate and Presidency last year. And for budgetary matters they really didn’t need more than the 58 or 59 votes the Democrats had in the Senate. They could have easily overcome differences amongst themselves.

The Democratic Congressional leadership didn’t pass a budget last year in September because they knew it would have a humongous deficit of over 1.5 trillion dollars, and didn’t want to give the Tea Party types any more ammunition than they already had. Doing it this way helped mute the issue a little. The fact that they thus appeared to incompetent to pass a budget was meaningless – everyone expects Congress to be incompetent anyway, and the uproar over the near shut-down included almost no acknowledgements (very few that I saw anyway) that a shut-down would have truly been the fault of Democratic Congressional leadership that choose political expediency over doing their primary job.

This year we will probably get both sides choosing political expediency over doing their jobs, come September. Believe me, I’m no fan of Congressional Republicans. I’ve really got no idea what that political expediency will be, though. It will depend on how suicidal various factions are over raising the debt limit in the next few weeks.

Icepick April 15, 2011 at 12:18 pm

Why would a return to the rates that prevailed under Clinton be economically harmful?

It would probably be marginally harmful, but not much. THe last couple of weeks the business channels have been all aflutter because high end consumers are spending more on high priced goods. I’m not sure that’s all that helpful to the rest of us. And even if it is politically expedient rhetoric, the Dems do have a point that the current Republican proposal seems to want all the sacrifices to come from the bottom 90% or so of the populace.

And should military spending really be exempt from budget cutting?

Depends on what one envisions the US military doing in coming years. Personally I think we either need to start kicking ass with the idea of stealing the wealth of other countries (especially those with Black Gold) or we need to scale way the hell back. There’s not much benefit accruing to the US from our current world policeman’s role that we couldn’t do more cost effectively. (That is, we can keep the sea lanes open and beat up on Latin America without having a huge standing army, and we could probably reduce the Air Force significantly as well.)

Have you never heard of deadweight loss? Can you really believe that a 49% maximum tax rate will not result in less economic activity? How many jobs are you willing to sacrifice to a war on the wealthy? And why not propose a wealth tax and attack the enemy’s front line?

The answers, in order are:

Yes, but so what.
Don’t care about that.
That’s a feature, not a bug, as they want more people on the dole.
They’ll get to that.

How can you restrict tax increases to those making over $250,000, expand the use of our military, and exempt two-thirds of the budget (Medicare and Social Security) from cuts? Details, please.

Come on, Dave, you know that he isn’t serious. Even if they come up with details, you know they will include assumptions even more ridiculous than those in the Ryan Plan. It isn’t a serious proposal to balance the budget.

When it first came out I thought the Ryan Plan might have been a good starting point for discussion (STARTING point – see Steve V’s comment above about the size of one part of the problem) but it turns out I was wrong. Ryan’s proposal is bogus as well, just different in the particulars.

Here’s a rule of thumb – no plan need be considered serious unless the people proposing it don’t acknowledge that there will be serious pain to be endured – by pretty much everyone. And no one is going to do that. It’s just a question of how soon we drive over the edge of the cliff.

Andy April 15, 2011 at 1:09 pm

What’s kind of striking amidst all the partisan rhetoric is how similar the Ryan plan and the PPACA are. At their core, they both plan to give subsidies (“vouchers”) where people can buy insurance in government-regulated exchanges. Yet if you’re a conservative Republican, the PPACA is dangerous socialism and if you’re a liberal Democrat the Ryan plan “destroys” medicare and throws old people and the poor under the bus.

steve April 15, 2011 at 2:53 pm

@Andy-The ACA uses the existing private insurance system and Medicaid. The Ryan plan takes people out of a less expensive Medicare system and puts them into the more expensive private insurance system, expecting the elderly to pay the large, large majority of the costs. I think the main bit of difference is that the Ryan plan uses some of these savings to finance tax cuts for the wealthy. The ACA uses savings to pay for health care.

Steve

Andy April 15, 2011 at 3:40 pm

steve,

I understand there are some big differences, but there are also some similarities.

Also, by what criteria is Medicare less expensive?

sam April 15, 2011 at 4:18 pm

Maybe we should do what test pilots do when things really go sideways — they call it the “Jesus Maneuver”: Let go of the controls and put the whole thing in the hands of a higher power.

Do-Nothing Congress as a Cure

A trick question: If Congress takes no action in coming years, what will happen to the budget deficit?

It will shrink — and shrink a lot. This simple fact may offer the best hope for deficit reduction….

Food for thought.

sam April 15, 2011 at 4:20 pm

“What’s kind of striking amidst all the partisan rhetoric is how similar the Ryan plan and the PPACA are.”

Yeah, I read that Alice Rivlin kept trying to convince Ryan of this, but, according to her, he would have nothing of it.

sam April 15, 2011 at 4:22 pm

“I think the main bit of difference is that the Ryan plan uses some most of these savings to finance tax cuts for the wealthy. The ACA uses savings to pay for health care.”

Bingo.

Drew April 15, 2011 at 4:28 pm

“The tax cuts of the early years of the Bush presidency did very little to stimulate the economy: mostly, they were saved.”

1. And saving is bad because……..

“Why would a return to the rates that prevailed under Clinton be economically harmful?”

2. Is saving a worse result than letting the government allocate those resources poorly through taxing and spending on, oh, you know, on Chevy Volts…….

“The cuts weren’t economically beneficial.”

See #1 and #2 above.

“And should military spending really be exempt from budget cutting? It’s the largest item of discretionary spending and I find it incredible that there’s nothing from it that can be spared.”

No, and me too. I also find it “incredible that there’s nothing from it that can be spared” when it comes to non-defense spending. But according to Democrats, even modest cuts in the 1-2% range will bring pestilance, rampant disease, grandma eating dog food, women targeted for cancer, children aimlessly roaming the streets and an economy to quote our increasingly ridiculous and clownish President that is “third world.”

Spare me.

sam April 15, 2011 at 4:34 pm

C’mon, Drew…stop with the softballs:

” But according to Democrats Republicans , even modest cuts tax increases in the 1-2% 3-4% range will bring [parade of horribles].”

john personna April 15, 2011 at 5:17 pm

You know Steve, I would never gossip about anyone on a 3rd party site.

I’d think it was beneath me. Seriously.

john personna April 15, 2011 at 5:36 pm

Heh, I just found what Steve was talking about above. This thread.

I hate to break it to you Steve, but I never went back, never read that last post.

I don’t see anything in it that really answers my core question, which is why you can be for the things in the President’s proposal, but be against the President’s proposal.

Your deeply irrational answer is that since the things you want never get passed, you must be against any attempt to pass them.

… of course, an ad hominem might make you feel better.

Steve Verdon April 15, 2011 at 6:17 pm

I’d think it was beneath me. Seriously.

You’ve confused me with somebody that cares….

Dave Schuler April 15, 2011 at 6:21 pm

sam, if you read that article closely you’ll find that the author is considering “do nothing” very narrowly. There are far too many things that are on automatic pilot that “doing nothing” could well have very serious adverse consequences and far too many things that aren’t on automatic pilot that “doing nothing” for any period of time would cause them to lapse entirely, e.g. military spending. I’m in favor of cutting military spending, removing our forces from Iraq with all due haste and reducing our forces in Afghanistan sharply but not all at once as would be the case if the Congress actually did nothing.

He appears to be referring only to allowing the “Bush tax cuts” to expire.

steve April 15, 2011 at 7:49 pm

@Andy- Medicare pays 20%-300% more than private insurance for equivalent procedures.

Steve

john personna April 16, 2011 at 6:12 am

“You’ve confused me with somebody that cares….”

Good Steve! That’s much healthier than the original comment.

pigdog67 April 17, 2011 at 12:15 am

I converted the 1.5 trillion dollar deficit into a number of 50K per year jobs. It is 30 million jobs. I find that astounding. So in a sense we could be looking at another 30 million unemployed. This is the damage that offshoring has done to our country. And it will get worse. People keep saying free trade is good for America. Because of the deficit Washington is booming. Lots of jobs there. With a balanced budget we would all be in depression including Washington. Then maybe Congress would realize that free trade is killing this country. I saw an video by an economist who lives in China (an American) describing how China, Japan and South Korea are all mercantilist and using it to rape America economically. It was quite interesting. Maybe in another 10 years people will get it?
I am glad to see someone is talking honestly about these issues. The Democrats and Republicans are not. And most people are living in some ideological fog and not thinking clearly.

Drew April 17, 2011 at 4:07 pm

sam -

” But according to Democrats Republicans , even modest cuts tax increases in the 1-2% 3-4% range will bring [parade of horribles].”

You miss the real argument: Those tax increases will simply be spent. Then you trivialize yourself by equating concerns over tax effects on economic activity, and Democratic claims of mass starvation and disease at trivial spending decreases. (The words of Democratic pols, not mine, BTW.) Your side has won this argument for years now. How’s it working out??

If you are in the budgeting business, which I am, once you decide that you will just dictate endless revenue increases or borrowing, and spending decreases (or rates of growth) of a trivial amount will result in old people, women and children being ground up into soylent green you are no longer in the budgeting business, you are just biding time before going bankrupt. It takes time. But our time is here.

By the way, see Dave’s subsequent post on the ability of tax increases to solve the problem.

Leave a Comment

Previous post:

Next post: