Budget Proposals 2

University of Chicago economist, John Cochrane, states: "No country ever solved a debt problem by raising tax rates." Higher marginal tax rates create a drag on economic growth while lower tax rates encourage innovation and investment. This probably goes without saying, but Representative Paul Ryan's "Path to Prosperity" proposal cuts taxes. And this economic theory proves itself time and time again; I will list three examples below...

 

The "Forgotten Depression" occurred in 1920, where gross national product decreased by 17% and unemployment skyrocketed from 4 to 12%. Warren G. Harding was sworn in as President in 1921 and immediately cut tax rates for all income levels. The economy rebounded at lightning speed: by 1922, unemployment was cut in half; by 1923, it was down to 2.4%. The "Roaring Twenties" followed.

 

From the end of WWII to 1960 the US experienced four minor recessions. In 1961, unemployment reached 7.1% and (newly-elected) President John F. Kennedy wanted to stop these cycles of recessions. In 1964, shortly after his assassination, his tax cut plan was signed into law; it cut the top bracket from 91 to 70% and the lowest bracket from 20 to 14%. Once again, the economy benefited immediately: $14 billion increase in gross national product (which was an even higher leap than predicted), 22% increase in auto production, 21% increase in corporate profits, and 7% increase in personal income.

 

In 1981, Ronald Reagan was inaugurated as President and came into the "Carter Recession." Newsweek announced: "When Ronald Reagan steps into the White House next week, he will inherit the most dangerous economic crisis since Franklin Roosevelt took office 48 years ago." He immediately cut tax rates and, eventually, reduced the top marginal rate from 70 to 28% by the time he left office. The US economy reached full employment (3-5% unemployment is "full employment") with 16 million jobs generated over the course of his presidency. The inflation rate dropped (13.5 to 3.2%) while real median family income grew by $4,000. Most importantly, the Reagan tax cuts nearly doubled federal revenue! Revenues from individual income taxes rose by 82% ($244.1 billion in 1980 to $445.7 billion in 1989.) Corporate income taxes rose by 60% ($64.4 billion to $103.3 billion.)

A quick side note: a similar thing occurred after the Bush tax cuts. After President Bush cut the dividend and capital gains taxes to 15% each in 2003, within two years, the stocks rose 20% and $15 trillion of new wealth was created. With the 2003 tax cuts, individual and corporate income tax receipts went up 40%, so the federal tax revenues from 2004-2007 increased by $785 billion-- the largest 4-year jump in US history. The reason why the federal deficit increased under the Bush administration had nothing to do with cutting tax rates, it was because he and the Democratic Congress spent into oblivion! Now, just like then, spending is our #1 problem, not taxes or revenue.

The Obama administration wants to raise the top tax rate to 44.8%, which would amount to $1.5 trillion tax increases on families and job creators. You may think that is fine-- they are rich, they can afford it. I guess that is partially true. But have you ever been hired by a poor man? If the rich get squeezed, you can be sure they will squeeze their workers to soften the blow to themselves, and we will all feel it eventually. Like Paul Ryan stated in a recent speech: "This class warfare is clever politics, but it is stupid economics. Redistribution of wealth does not create wealth. And bottom line, the government cannot close its enormous fiscal gap by simply taxing the rich."

In addition to cutting taxes, Ryan's budget scales back and eliminates loopholes in the current tax code that distorts economic incentives. For example, 25 years ago, the GE CEO Jack Welch introduced himself at the Economic Club of Chicago by saying: "I represent a company that does not pay taxes." That is just not okay.

Finally, like I stated above, this budget proposal did not pass the Democratic-held Senate, however, Ryan has set the stage for debates on concrete examples of what this country needs to get back on its feet. I truly believe that the Obama administration is currently putting us on a path for decline, the American decline. Hopefully, Washington wakes the hell up and something like the "Path to Prosperity" will continue to be discussed (or passed!) as the 2012 elections near. So, I will end this post with a quote by John Kemp, Paul Ryan's mentor, which illustrates the difference between the above proposal and President Obama's strategy:

"We cannot progress as a society by using government to diminish one another. The only way we can all have more is by producing more, not by bickering over how to share less. Economic growth must come first..."

Budget Proposals 1

US NATIONAL DEBT

The US is over $14 trillion in debt, the S&P recently downgraded our credit rating outlook from stable to negative, and our Congress continually refuses to pass a budget, but has consistently raised the debt ceiling in the past. We need to stop kicking this metaphorical can down the road because (sooner rather than later) China and everyone else to whom we owe money is going to own that can, and that road, and there will be nothing left to kick but ourselves. How can we possibly explain to our future generations the reason for leaving the United States of America in worse shape than which it was given to us?

Representative Paul Ryan wrote a budget proposal called "Path to Prosperity." It passed the House, but unfortunately, the Democratic-controlled Senate voted against it in May. Even though it did not get past Congress, at least he was the first one to step up and do the dirty work of making the hard decisions on concrete spending cuts and detailed entitlement reformation. His budget does so in order to save our entitlement programs, take a chunk out of our debt, and put us on the path for economic growth.

The current budget negotiations are getting nowhere and they will probably talk right up to the deadline. I do not know about you, but anything that I have ever left until the last minute has not worked out too well. In those circumstances, it ends up being a half-assed, lesser version of what it could have and should have been. Either way, no matter what finally gets passed by Congress, the economy and the national debt will still be some of the main issues in the 2012 elections. This is why I wanted to post about it. The details of Ryan's budget make an excellent proposal and the American economy needs something like it.

SPENDING CUTS

First, let's acknowledge that Ryan's budget actually has $35 trillion of new spending, it is just less new spending than Obama's $49 trillion. I think this just illustrates how ludicrous the spending is from the current administration and Congress.

Representative Ryan is essentially taking the spending back to what it was four years ago, before Representative Nancy Pelosi and the Democrats took over Congress in 2007 and before President Obama took over the White House in 2009. (Side note: this is not to say that the Bush administration is not at fault as well; he passed TARP and allowed the national debt to reach $9.5 trillion by the time Obama took office.) However, the current administration and Congress have already increased it to just over $14 trillion-- that is almost $5 trillion in just two years! (That is half of what it took the country over 200 years to reach.)

Opponents argue that it cuts x percentage of y group and another z percentage of x group. This is part of the demagoguery of this budget because those numbers are being referenced to either A: increases in spending that Obama wants but will not happen with this budget (so I guess now "not increasing" = "cutting") or B: the current spending level that only increased recently under the outrageous spending frenzy of the (not-so) stimulus plan.

ENTITLEMENT REFORMATION

Since the poorest individuals rely the most on the government, it goes without saying that they would be hit the hardest in the case of a fiscal crisis. This is why it is imperative to repair our entitlement programs before they run out of money! I will not get into Medicare reformation because I already dedicated an entire post to the reforms proposed in "Path to Prosperity." But let's not forget: no legislation or proposal can be serious about deficit reduction unless they address Medicare and health care costs.

As for Ryan's budget proposal on Medicaid, opponents state that it cuts benefits for the low-income individuals in this program. That is simply not true. This budget strengthens Medicaid by converting it into a block grant system-- the same thing the government did with welfare in the late 1990s. The initial allocation of federal funds would be exactly as much as the states receive for Medicaid today, and it would grow every year to account for inflation and population. The advantage to the block grant system is allowing states more flexibility to tailor their programs and benefits to fit the specific needs of their low-income populations. This makes sense: low-income individuals in Texas or Florida have different health risks and needs than those in Chicago or New York, based on geography, demographics, weather, etc. So, this change allows states to be more efficient and less wasteful with the Medicaid money that is given to them.

TAX CUTS

Along with spending cuts and entitlement reforms, the budget addresses many other things like regulatory reform and federal reserve changes. It does so in order to reduce crony capitalism and decrease economic uncertainty. And finally, another major aspect of Ryan's proposal are tax cuts. That probably goes without saying, however, I am going to say something (a lot actually) in a post-to-come!

Medicare

If nothing is done to correct it, Medicare is scheduled to run out of money by 2024. That is less than 15 years! This fact makes opponents of Paul Ryan's budget, "The Path to Prosperity," sound ridiculous when they say his plan "shuts down Medicare." No, Medicare will shut itself down if we change nothing. And if we let it spiral out of control on its own, its beneficiaries will have no time to prepare or adjust to the sudden cuts and/or demise. So, let's take a look at "The Path to Prosperity" reform of Medicare...

Medicare, in its current form, has 75% of its recipients (35 million seniors) under a fee-for-service (FFS) insurance plan. This means: you go see a doc, receive some health service(s), the doc sends the bill straight to Medicare, and Medicare reimburses the doc with tax (and borrowed) dollars. Two problems: first, the separation of patient and cost leaves little incentive for the patient to demand the best value for his buck. Second, the reimbursements are one-size-fits-all; it is the same to all doctors and hospitals, no matter what the quality of care or how high the cost. This gives less incentive for hospitals to deliver the best care at the lowest price. (I have seen this part first-hand while rotating at Chicago's JHS Cook County Hospital.)

Paul Ryan's "The Path to Prosperity" budget does nothing to change Medicare for those aged 55 or older. The seniors already in, or close to, the Medicare system do not have to change or adjust to anything. For the future generations that need change to the Medicare system so that it still exists then---rather than putting the federal government's health care administrators in charge (since they have been trying to micromanage Medicare in order to control costs for four decades now and still have not succeeded)---Ryan's budget gives the power to the individual. In 2022, new Medicare recipients would have a "premium support system," not a voucher system. It essentially mirrors Medicare's prescription drug benefit program as well as the health care system that Congressmen and federal employees enjoy.

Side note: Medicare's prescription drug benefit was enacted in 2003 and it became the first truly competitive market in the program. Basically, beneficiaries get a fixed-dollar entitlement that they can use to buy drug coverage from a variety of competing plans. The insurers keep costs down to attract price-sensitive enrollees while the government has no role in setting premiums or drug prices. How is it working, you ask? Well, costs are now expected to come in 37-45% below original expectations over the first decade.

So, this budget addresses the ever-rising health care costs the same way other sectors of the economy have been (and should be now) corrected: with a well-functioning marketplace, cost-conscious consumers, and competing prices. In 2022, new Medicare enrollees would get a "defined contribution" or "premium support" payment from the government. (At first, it would equal the average cost of Medicare coverage. However, over time, its value would grow at the rate of inflation.) Beneficiaries would be given a menu of insurance options on which to spend their entitlement. The value of the "defined contribution" would be set independently of whatever insurance plan they select. So, if one selects a higher-than-normal premium, he would spend more out-of-pocket, and vice-versa. Also, lower-income seniors and those with greater health care risks would receive greater support, while wealthier seniors would receive less. (This should make the Dems very happy; each paying his "fair share" while also salvaging an entitlement program. Come on, Dems!)

Some opponents suggest this would only shift rising premium costs onto beneficiaries, but this is how Ryan's plan differs innately from anything the government has previously done. This plan sets into motion an entirely different market dynamic that achieves greater efficiency and lower costs. Cost-conscious consumers would look for the best value for their money, whichever insurance plan that best fits them and their families. Not only would cost-cutting innovation be rewarded, but doctors and hospitals would have financial incentives to reorganize to be more productive and efficient in order to capture a large share of this highly competitive marketplace. All of this would slow health care costs without compromising quality, essentially providing "more bang for your buck." Furthermore, the government's role in this is not micromanagement, phew! They would play a part in oversight: participating insurance companies must offer transparent pricing as well as meet both minimum-benefits and minimum-quality standards.

In the end, this solution keeps current Medicare recipients as is; it offers future generations a strengthened program with options; and it puts our health care system on a more productive and efficient path. And what is the alternative, you ask? (Beside letting Medicare implode in 2024.) Well, Obamacare basically expands the failed model of the current Medicare system. Why expand a bankrupting system to the entire nation? How will they control costs? Well, Obamacare will enforce a spending cap on Medicare via a board of 15 unaccountable, unelected bureaucrats---the Independent Payment Advisory Board (IPAB.) Since the IPAB is strictly limited in what it can recommend and implement, it would attempt to hit budgetary targets by essentially cutting Medicare payment rates for those providing services to the beneficiaries. These price controls encourage more consumption, forcing physicians to charge non-Medicare patients even more, inevitably driving up costs. Finally, the chief actuary for the Medicare program warns that Obamacare's cuts will drive scores of providers (about 15% of the nation's hospitals) from the program because payments will be too low to cover costs. Hello, rationing of care.

Unfortunately, Paul Ryan's budget did not pass the Democratic-controlled Senate; they voted against it (57-40) this past Wednesday. However, I believe it will remain a major issue as the 2012 elections near, as it should. Rep. Paul Ryan was the first to step up and provide a concrete budget plan while also opening the door to discussions on much-needed entitlement reforms. We need these reforms so that these programs still exist in the future! His budget also addresses many other issues including spending and tax cuts. Obviously, another post on "The Path to Prosperity" budget is in the making!

ObamaCare

Approximately one year ago, President Obama signed into law the Patient Protection and Affordable Care Act (aka ObamaCare.) As much as I want every American to have insurance and, in effect, have access to affordable health care, ObamaCare brings to mind the classic quote: "great in theory, bad in practice." I do not think the answer to our current health care system--which is flawed!--is completely gutting the existing structure and replacing it with an equally fallible one. I believe the solution involves addressing the shortcomings of the system in place. I also believe that, throughout the deliberation and creation of said solutions, lawmakers should remain conscientious of the federal deficit and prevent establishing programs that threaten to bankrupt the country once and for all.

By 2014, it is estimated that ObamaCare will result in an additional 16 million people on Medicaid. The (already indebted) federal government plans to "foot the bill" for this surge for three years, however, the states will start picking up their portion of the cost after that. To illustrate the effect this will have on states, here are two examples: First, Virginia currently allocates 21% of its entire budget to Medicaid; ObamaCare will cause that figure to increase to 28% within a few years. Likewise, ObamaCare will push Texas into spending approximately 46% of its budget on Medicaid; call me crazy, but designating almost half of a state's budget to just one program is ludicrous. Increases like these will occur across the nation and they translate into one of two things (or both:) States will have to cut spending on other programs, such as education, and/or they will have to raise taxes.

The Independent Women's Voice held an "IWV ObamaCare Video Contest" which asked for a 1-minute video portraying why ObamaCare is bad for the country. So, I made a video. After getting a decent number of votes, the IWV (and I) realized I had violated one of the fine print rules by putting a licensed song in it, so they took it down. Even though it was removed from the contest, I still want to share it with others because I strongly believe in its message. So, here it is!