Insolvent? Not Yet…Keep trying, Obama!

18Apr11

Not Tax Cuts, Not Wars, and Not Bailouts
What is really driving America into insolvency.

Your average poorly informed lefty (but I repeat myself) will reliably tell you that our current fiscal straits are the result of three things: 1. Bush’s wars; 2. Bush’s tax cuts for the rich; 3. Bush’s bank bailouts.

That is not true, of course: The main bank bailouts (odious as they were) have been paid back, often at a profit. The money-losing parts (and the likely money-losing parts) are the ones insisted upon by Barack Obama and his Democratic colleagues: the foreclosure-prevention programs, the endless maintenance of Fannie Mae and Freddie Mac, etc.

Our deficit is running around $1.6 trillion. If we took all military spending — not just the Iraq and Afghanistan wars, but the whole shebang — and cut it to $0.00, we’d save about $664 billion a year. Iraq and Afghanistan will cost about $170 billion combined in FY2011. Ending the Bush tax cuts for “the rich” — for the $250,000-and-up crowd, in Obama’s formulation — would put on average about another $80 billion a year into Treasury coffers. (CBO estimates the ten-year cost of those tax cuts at $800 billion.) The spending on the wars and the forgone revenue from the Bush tax cuts do not add up to much of that $1.6 trillion deficit: a little less than 16 percent.

The tax cuts for the unrich were a good deal more expensive, which is why Obama’s rhetoric on the tax cuts sort of makes my head hurt: The president says he agreed to tax cuts for “the rich” only to preserve tax cuts for “the middle class” — which is to say, he agreed to a mere $800 billion in tax cuts that he didn’t want in order to preserve a considerable $2.2 trillion in tax cuts that he did want — and then argues that our problem is too many tax cuts, two-thirds of which he was so intent on keeping that he took the other third, too. But even that $2.2 trillion over ten years would not make much of a dent in our $1.6 trillion annual deficit.

And just who are these “rich”? Under Obama’s arbitrary, politically minded cutoffs ($200,000 for an individual, $250,000 for a couple), a public-school administrator earning $130,000 a year married to a pharmacist earning $125,000 a year and raising four kids is rhetorically lumped in with “millionaires and billionaires,” as the president put it, and desperately in need of a tax hike — but a single guy earning $198,000 a year is in the middle class, and his $2.2 trillion in tax cuts must be protected.

Definitional quibbles aside, the war spending and the Bush tax cuts don’t add up to a whole lot in the context of the $1.6 trillion deficit. What does?

The Department of Health and Human Services will see more than $900 billion in outlays in FY2011. About $83 billion of that is discretionary spending on things like the Centers for Disease Control. Almost all of the rest is Medicare and Medicaid — the two programs that President Obama has vowed to shield from substantial reform of the sort envisioned by Rep. Paul Ryan. The other big driver of spending, as the president himself acknowledged yesterday, is Social Security, meaningful reform of which he also promises to resist.

Obama’s big plan for the health-care entitlements is appointing a committee, called the Independent Payment Advisory Board (IPAB). This committee will be composed of experts. (Really.) And they will, the president promises, expertly discover ways to reduce Medicare spending. At the end of that sentence is an invisible asterisk: The committee is forbidden to change anything about the structure of Medicare, to increase premiums, to change cost-sharing arrangements, etc.

It is also forbidden, on paper, to ration care. That is because it does not need to ration care: What it can do is cut payments to doctors, pharmacies, hospitals, etc., which simply pushes the dirty work of rationing and denying care off on them. If it costs X to provide a particular service, and IPAB sets the price at <X, that service will not be available to Medicare patients. And Medicare recipients can all thank the heavens that their health care is not being “rationed” as products, services, and procedures simply disappear from the menu.

We have tried a similar approach before, with legislation that requires cuts in Medicare reimbursement rates. Congress simply votes to suspend the law when the cuts come due. Congress can vote to ignore IPAB’s cuts, too, though it is procedurally harder to do.

None of which matters very much in the context of a $1.6 trillion deficit and a $14 trillion–plus national debt. Current CBO estimates of the savings to be realized from IPAB range from a high of $28 billion over ten years to a low of $0.00 over the same period of time. If IPAB performs to perfection — if it performs twice as well as CBO expects — it still will not make much of a dent in things.

A study from Credit Suisse puts the net value of all the financial assets in the world (excluding real estate) at about $80 trillion ($117 trillion in financial assets minus $37 trillion in household debt). Our unfunded entitlement liabilities are about $100 trillion. Given that they exceed world financial wealth, I suspect that those liabilities are not going to be met. Crazy hunch I have.

As I have argued before, what we are really negotiating about at this point is not how we are going to go about paying for these things, but how we are going to go about not paying for these things. Paul Ryan’s plan for Medicare is to let Americans shop for health-care coverage and then have the government pay the first $15,000 in premiums — a reasonably generous deal. (And even more generous for the very poor.) That premium support would grow relatively slowly, putting pressure on both consumers and providers of health-care to reduce costs. This is eminently sensible — critical, in fact: The reason that cellphones and computers don’t cost $10,000 isn’t that Motorola and Apple love us: It’s that consumers spending their own money are cost-conscious, so everybody has to compete on both price and quality. The only important products in the United States that do not get better and cheaper every year are K–12 education and health care, which are about 97 percent and 55 percent dominated by the government, respectively, and therefore have little consumer-price pressure.

Obama’s alternative is another magical committee of wise men, no doubt drawn from the same stale bowl of political Froot Loops from which he spooned up his various czars and advisers, from Marxist nut cutlet Van Jones to tax-dodging Treasury boss Tim Geithner. Markets aren’t perfect, but I trust consumers to make their own decisions better than I trust Obama and these jokers to make them on our behalf. Either way, cuts are coming, and the main question now is what shape they will take and who gets to make the final choice about health-care decisions: consumers and providers, or Obama and his experts.

— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery.

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