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Archive for the ‘Budget Deficit’ Category

CBO Confirms Tickerguy’s Projections…..

Here’s the old sign again…

(Reuters) – Gvernment spending for Medicare, Medicaid and other healthcare programs will more than double over the next decade to $1.8 trillion, or 7.3 percent of the country’s total economic output, congressional researchers said on Tuesday.

In its annual budget and economic outlook, the non-partisan Congressional Budget Office said that even under its most conservative projections, healthcare spending would rise by 8 percent a year from 2012 to 2022, mainly as a result of an aging U.S. population and rising treatment costs. It will continue to be a key driver of the U.S. budget deficit.

That’s not going to happen, because it can’t.  That number would represent approximately 1/2 of today’s Federal Budget, incidentally.

The bad news is that it doubles again in another eight years.

This is the nature of all exponential functions folks.  Compound growth just is, and it is never, ever sustainable over the intermediate and longer term.  Yet we’ve played this game since 1980, with medical spending by the Federal Government expanding at roughly 9% for that entire 30 years.

What’s worse is that the bolded text is false — in the private sector insurance costs are rising at least as fast as they are in the government.  When I ran MCSNet in the 1990s we were seeing double-digit premium increases every single year, and this is still going on.  The only way to keep it under some resemblance of control was to cut back on the offered services in the plan, but on a “like-for-like” basis there was never a year during my time running MCSNet that we saw increases under 10%. 

Not once.

There is no solution to this problem that can be found with “reform” of Medicare and Medicaid.  The problem lies in the underlying medical system in this country and addressing it must happen there, not through things like Obamacare or changes in the government side.

The ridiculous growth in medical costs have come from ridiculous cost-shifting and obfuscation, along with a completely-unrealistic set of expectations.

Consider the cost of putting a man on the moon.  We can do it, but it’s ridiculously expensive.  Likewise, we can put men in space at the ISS, but on a per-person basis it’s ridiculously expensive.  Ditto for flying in a private jet — yes, you can do it, but it’s ridiculously expensive.

Now consider what would happen if everyone could demand and enforce via government a ride in a moon rocket, a month at the ISS, or the ability to walk into any executive airport and demand that the Lear sitting there immediately take off for Bermuda, irrespective of how much money you had in your bank account!

That’s exactly what we’ve done in the medical system.

Provenge is just one example.  Dendreon developed the drug for late-stage metastatic prostate cancer, a terrible disease.  Statistically it adds 4 months to your life, but costs $100,000.  So for about a quarter of a million dollars per person-year, you can have it — the problem is that you don’t need to have the quarter of a million bucks first, or choose to spend your own funds on the treatment.

Bypass operations and myriad other very expensive procedures, drugs and devices are also part of this problem.  Many chronic conditions have costs in the tens or even over a hundred thousand a year, yet your access to those treatments is not conditioned either by your lifestyle choices that led to the problem (or lack thereof) or your ability and willingness to personally spend the money.

The medical industry capitalizes on all of this and then adds both anti-trust exemptions and intentional forced cost-shifting onto the backs of those who can pay for those who can’t.  This is why the aspirin in the hospital costs $25 — you’re paying for Juanita the illegal immigrant who showed up last night in labor at 7-1/2 months, having drunk and drugged herself during pregnancy while receiving zero prenatal care, and pooped out a severely-underweight kid who’s now in the NICU and is in the process of running up a million dollar tab.  This happens every single day and it is why you can buy the same operation in India, performed by a US trained doctor with US medicines, devices, and operating room equipment with a hospital room that is equipped like a luxury suite in the Ritz-Carlton to recover in for 1/5th the cost of the same procedure here in the United States.

Then there’s defensive medicine.  You show up with a non-specific pain in the abdomen.  The doc checks what he can and rules out appendicitis (an immediate emergency) and a few other things.  Now there’s a problem — he has a list of a dozen things running around in his head that could be wrong with you.  There’s a 10% chance that one of the couple of really nasty ones (such as cancer) are involved but ruling them out will require $5,000 worth of tests.  The odds, however, are 90% that the problem is not serious and is something as simple as a mild case of food poisoning.  Who’s money and risk is involved in the decision as to whether or not to run those tests?  Today, the answer is that they get run every single time because if he doesn’t and you hit the bad dice roll you’ll sue (and win.) 

In short you’re not required to allocate the risk and cost on your own.

There’s no fix for Medicare and Medicaid, nor for the Federal budget, without resolving all of this.  And make no mistake folks, this will blow up and destroy not only the federal budget but privately-provided medical care as well within the next five years if we don’t stop it right now.

Here we go again….

Republican Rep. Paul Ryan plans to unveil a new Medicare proposal Thursday that would give future seniors the choice of purchasing private insurance coverage or staying in the traditional federal plan.

This will do exactly nothing.

Here’s the underlying problem that nobody is offering a legislative agenda to address: Medical spending in the Federal Budget has expanded at a compounded rate of 9% since 1980 and is projected to continue to do so.

The reason for this is that medical care generally in the private economy (e.g. health insurance premiums) is expanding in price at roughly that rate or better for the last 30 years as well, and as such so is the government side of it.

At present the government spends about $800 billion a year (up from ~$53 billion in 1980!) on medical care in all of its programs.  At 9% compounded rates of growth for the 50 year old by the time he reaches 85 (35 years from now) this spending is projected to increase to $16.3 trillion.

That obviously won’t happen — the entire federal budget is currently $3.8 trillion and the entire economy is $15 trillion.  If the economy grows at 3% annually every year for the next 35 years the economy will be $42 trillion in size; with the government being ~20% of the economy ($8.4 trillion) this would still leave medical care totaling twice the entire federal budget.

Again, that obviously won’t happen because you can’t spend more than 100% of something as a subset of that thing.

This has to be stopped — right here and now.

The expansion is being caused by the massive cost-shifts through all areas of the medical system.  As I detail in Leverage these cost-shifts are pervasive and outrageous — we effectively in America pay for the development of every advanced technology and treatment and subsidize government-run health care worldwide!  This is a very profitable model for pharmaceutical and device makers, not to mention all the other providers who look at the provision of these products as “cost plus” — the higher the price, the greater in dollars the “plus” percentage is.

There are too many points of debate to cover in one ticker on this; you can go back through my various points in this regard using the Archive function if you wish, or buy a copy of Leverage and read it for a more-succinct yet reasonably-complete treatment of the problem.

What we cannot do is continue to sit back and watch partisans like Ryan continue to lie through his teeth, along with the others in Congress on both the Left and Right.  If we do not get our arms around this portion of the Federal Budget in the immediate future it will lead to the destruction of the US Government and our way of life.

Hmmm…

Republican presidential candidate Ron Paul on Monday laid out an economic plan that would lower corporate and individual taxes and cut federal spending by $1 trillion during his first year in office, achieved partly by eliminating five cabinet-level departments.

Mr. Paul, a longtime Texas congressman, said he would close the departments of Education, Energy, Commerce, Interior and Housing and Urban Development, as part of a broader plan to cut federal spending. The federal work force would be cut by 10%. Mr. Paul also called for stopping foreign aid and “ending foreign wars.”

Now that is cutting spending.

It also likely has the media power and public acceptance of about 3% of the population, because doing so will instantly collapse the entire ponzi game that has been run for the last 30 years.

It needs to happen too.

But it won’t.

Nonetheless, I do give Mr. Paul credit for putting it forward and actually saying what needs to be said in this area.

And while turning Social Security and Medicare into programs that people can “opt out” of sounds good, neither step does anything about the promises made that cannot be kept.  So…. what’s the plan there and how do we avoid the boomer blowup problem?  (Incidentally, again for those who missed it the last time, if we assume a current cost of medical insurance for a healthy 50 year old of $600 monthly, by the time he turns 85 at current cost escalation rates that policy costs about $12,000 – per month – or nearly $150,000 a year!)

The fail in this plan is that it does not address the 900lb Gorilla in the China Shop, which is the medical system.

That has to be fixed or the rest simply doesn’t matter and Ron Paul, like the rest, fails to address it, moving part of it to the States (sorry, shifting dollars doesn’t address the problem) and doing nothing of materiality with the rest.

The plan is, however, a start.

There is only one piece of good news with regard to Jeff Miller, and that is that he must stand for election next November and thus we can vote him out.

After this bit of tripe, do you need more reasons to do so?

On Monday, President Obama released a plan for deficit reduction that pushes an agenda of tax increases and lacks serious reforms to entitlements, rather than putting forward a bipartisan proposal for putting America back on a path to fiscal prosperity.

That’s correct, Obama’s “plan” is a scam.  But this sort of misdirection belies the fact that Miller’s ideas are also a scam.  This is the common polit-speak of the polished turd found in our “Conservative” party.  Shall we explore?

After months of negotiating with Republicans on a compromise to reduce the deficit, the President took a turn toward more liberal ideals this week. Unfortunately, the American people are left holding the bag, waiting for a President who promised compromise, but offers none. His plan for deficit reduction is based on worn-out ideas and faulty economics, instead of job creation and spending cuts. These proposals could not pass when Democrats controlled both Houses of Congress, and they will not pass now.

Well then I’m sure you can point to actual spending reductions (that is, below the level of last year’s spending) in your plans, right Mr. Miller?  Oh wait – you can’t.  In fact, Ryan’s plan along with the others increased social spending, with one of those “plans” increasing Social Security spending fifteen percent in each of the first two years.

Cuts?  Where?

Take, for example, the Administration’s proposals for Medicare and Medicaid. For over a year, Republicans and Democrats have agreed that these two entitlement programs need fundamental reform to keep them viable for the next generation of Americans. We disagree on the nature of this reform, but at minimum, we agree reform is needed. However, in these programs which will collectively spend $10 trillion over the next decade, the President’s plan calls for only $320 billion in savings, a roughly three percent savings.

Ok, so what is your plan?  I will remind you that both you and Mr. Southerland stood before a room full of voters a couple of months ago and told us that nobody over 50 would see a change in Social Security or Medicare.  Yet this group of people is the very group of people bankrupting the system – the boomers.  It is the demographic disaster that cannot be changed (short of killing them all, of course) that is driving the problem.  You and Mr. Southerland didn’t like being called on that, probably because half of the people in the room that evening were retired.

But that you didn’t like it, and refused to address the facts, doesn’t change them.

The Medicare and Medicaid cuts would not even cover the size of the “doc fix” that Congress must pass to prevent a 30 percent cut to doctors at the end of the year. The President’s plan assumes the doc fix will be signed into law at a cost of $370 billion, but does not suggest a way to pay for the permanent change. Furthermore, the proposal avoids any changes to the Medicare benefit until after 2017, conveniently timed with the end of a second term in office. Between now and 2017, all of the proposed savings are on the provider side of the equation, including new price controls on pharmaceuticals and cuts to hospital reimbursements, on top of the Medicare cuts found in the President’s 2010 health care bill. This is not the structural reform needed to shore up a system that even the President’s Chief of Staff said will run out of money in five years. These are simply tweaks to a system that is fiscally unsound and will do little to actually reduce the deficit in the future.

So what structural reform are you proposing Mr. Miller?  Please be specific, and keep in mind the above demographic fact, because I intend to tattoo it on your forehead at every opportunity from now until the election.

In addition, I disagree with President on tax increases. Instead of proposing a comprehensive tax system overhaul, as House Republicans have offered again and again, the President’s proposal takes aim squarely at the country’s job creators in the middle of an already lengthy period of high unemployment rates. His deficit reduction plan would allow the 2001 and 2003 tax cuts expire for wealthier Americans, many of whom are small business owners. It reduces the value of itemized deductions to 28 percent, striking a huge blow to charities across the country. It creates a type of alternative minimum tax for those who make over $1 million a year, called the Buffet Rule after billionaire Warren Buffett. And yes, it eliminates depreciation rules for corporate airplanes and subsidies for oil and gas companies.

Ok.  I happen to believe that tax increases are not going to solve the problem, but for a different reason.  We’ll get to that.

I happen to agree with the President that Warren Buffet should not pay a lower tax rate than his secretary. However, the facts do not bear this situation out. The claim that the wealthiest Americans pay less in taxes than middle-class Americans is class-warfare at its finest and moreover, simply not true. In reality, the top 10 percent of earners pay nearly 70 percent of all income taxes, according to the IRS. The IRS also reports that those making over $1 million pay 24.4 percent of their income in federal income taxes. Those making between $100,000 and $125,000 pay 9.9 percent, and those making $50,000 to $60,000 pay 6.4 percent. The Tax Policy Center estimates that 46 percent of tax filers will pay no federal income tax this year.

These numbers are not a defense of tax cuts for corporate jet owners or the rich. They simply show that the President’s basis for tax hikes on job creators are misguided and are only being used to pay for more federal spending. The ratio of tax increases to health care entitlement reforms in his plan is five to one ($1.5 trillion versus $320 billion). The plan then counts $1 trillion in “savings” from ending the wars in Iraq and Afghanistan, which are scheduled to end regardless and should not be counted in deficit reduction savings. With other entitlement changes and fees included, the President’s proposal then includes the $1 trillion in cuts already achieved in the Budget Control Act to reach a target reduction of $4 trillion.

President Obama said it best when announcing his proposal, “It’s math.” Unfortunately, the Administration needs to work on its addition and subtraction. Instead of adding new taxes and fees, we need to be adding jobs. Instead of punting on entitlement reform, we need to start subtracting from the deficit by making major reforms to Medicare and Medicaid. The President’s plan does neither. I hope the President will come back to the table and work with Republicans on our plan to create jobs and to reduce the national deficit.

You have no plan to do that either.  As I said, we’ll get to that.

House Republicans have put forward a plan to reduce the deficit significantly without halting job growth by imposing tax increases. We started with the Republican budget, passed by the House in April, which would reduce and freeze domestic spending, would protect the future of Medicare and Medicaid while making sensible reforms, would shore up Social Security, and would lower both the corporate and individual tax rates.

These are impossible contradictions.  The Federal Government expanded in size at a roughly 7% rate over the last decade.  The economy expanded at roughly 4% rate.  The difference, plotted out over 100 years, looks like this:

You don’t really think that’s going to happen, do you?  After all, the government can’t grow to a greater size than the economy is – that’s impossible.  So let’s see… where does that happen?

Oh, about right at 50 years hence.

So when are you going to stop lying to the American public Mr. Miller?  Never mind that this assumes a 4% GDP growth rate, which is entirely unrealistic given the debt load in the economy today.

Over the summer, House Republicans put forward the Cut, Cap, & Balance plan to cut spending now, cap future spending, and pass a balanced budget amendment to the Constitution. Some of the Cut, Cap, and Balance plan made it into the Budget Control Act signed into law in early August. Federal spending was cut by almost a trillion dollars. In addition, Congress is forced to make at least an additional $1.2 trillion in cuts by Christmas and is required to vote on the Balanced Budget Amendment.

Cut, cap and balance “cut spending” from baseline figures, which were in fact no cut at all.  A cut is a reduction from last year’s numbers, not some automatic escalator.

Most importantly, nothing in our plan for deficit reduction and job creation includes tax increases. In fact, tax rates would be lowered for all Americans, and the tax code would be more simple and fair. Our Plan for America’s Job Creators allows businesses to create jobs by putting in place a system without over-burdensome regulations or high taxes. Senate Democrats and the President need to work with us to pass these reforms now to get our economy moving again. There is too much uncertainty and businesses are waiting on the sidelines to see how much they will have to pay in taxes, how much health care the government will mandate they purchase, and how many new regulations the Administration will enforce. Congress and the President need to come to the table, pass a plan that will cut federal spending, reduce the deficit, and provide jobs to the millions of unemployed Americans who are tired of Washington inaction on the issues that matter most.

Your “plan” is mathematically bankrupt.

The facts are this: Withdrawing deficit spending by either tax increases or actual spending cuts will cause GDP to decrease.  This is because GDP = C (consumption) + I (private investment) + G (government spending) + [x - i] (net exports)

If you cut government spending (“G”) then GDP must decrease dollar for dollar.

If you raise taxes then “C” or “I” must decrease dollar for dollar, because each dollar you take in taxes is one that the person you tax cannot spend on either consumption or investment.

This is literal second-grade math and you insult the intelligence of the voters in your district, not to mention everyone else, when you refuse to address this point, exactly as you did at the Town Hall meeting.

Are you ready for part two of the global financial collapse?  Many now fear that we may be on the verge of a repeat of 2008 after the events of the last several days.  On Friday, Standard & Poor’s stripped the U.S. government of its AAA credit rating for the first time in history.  World financial markets had been anticipating a potential downgrade, but that still didn’t stop panic from ensuing as this week began.  On Monday, the Dow Jones Industrial Average dropped 634.76 points, which represented a 5.5 percent plunge.  It was the largest one day point decline and the largest one day percentage decline since December 1, 2008.  Overall, stocks have fallen by about 15 percent over the past two weeks.  When Standard & Poor’s downgraded long-term U.S. government debt from AAA to AA+, it was just one more indication that faith in the U.S. financial system is faltering.  Previously, U.S. government debt had a AAA rating from S&P continuously since 1941, but now that streak is over.   Nobody is quite sure what comes next.  We truly are in unprecedented territory.  But one thing is for sure – there is a lot of fear in the air right now.

So exactly what caused S&P to downgrade U.S. government debt?

Well, it was the debt ceiling deal that broke the camel’s back.

According to S&P, the debt ceiling deal “falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.”

As I have written about previously, the debt ceiling deal was a complete and total joke, and S&P realized this.

Forget all of the huge figures that the mainstream media has been throwing at you concerning this debt ceiling deal.  The only numbers that matter are for what happens before the next election.

The only way that the current debt ceiling deal will last beyond the 2012 election is if Obama is still president, the Democrats still control the Senate and the Republicans still control the House.  If any of those things change, this deal ceiling deal is dead as soon as the election is over.

Even if all of those things remain the same, there is still a very good chance that we would see dramatic changes to the deal after the next election.

So in evaluating this “deal”, the important thing is to look at what is going to happen prior to the 2012 election.

When we examine this “deal” that way, what does it look like?

Well, Barack Obama and the Democrats get the debt ceiling raised by over 2 trillion dollars and will not have to worry about it again until after the 2012 election.

The Republicans get 25 billion dollars in “savings” from spending increases that will be cancelled.

The “Super Congress” that is supposed to be coming up with the second phase of the plan may propose some additional “spending cuts” that would go into effect before the 2012 election, but that seems unlikely.

So in the final analysis, the Democrats won the debt ceiling battle by a landslide.

25 billion dollars is not even 1 percent of the federal budget.  The U.S. national debt continues to spiral wildly out of control, and our politicians could not even cut the budget by one percent.

Somehow our politicians believed that the rest of the world would be convinced that they were serious about cutting the budget, but it turns out that global financial markets are tired of getting fooled.

It has gotten to the point where now even the big credit rating agencies are being forced to do something.  Not that they really have much credibility left.  Everyone still remembers all of those AAA-rated mortgage-backed securities that imploded during the last financial crisis.  The reality is that the big credit rating agencies are a bad joke at this point.

Several smaller credit rating agencies have already significantly slashed the credit rating of the U.S. government.  But a lot of pressure had been put on the “big three” to keep them in line.

But now things have gotten so ridiculous that S&P felt forced to make a move.

Sadly, our politicians are still trying to maintain the charade that everything is okay.  Barack Obama says that financial markets “still believe our credit is AAA and the world’s investors agree”.

Once again, Barack Obama is dead wrong.

The truth is that the credit rating for the U.S. government should have been slashed significantly a long time ago.  This move by S&P was way, way overdue.

Moody’s might be the next one to issue a downgrade.  At the moment, Moody’s says that it will not be downgrading U.S. debt for now, but Moody’s also says that it has serious doubts about the enforceability of the “budget cuts” in the debt ceiling deal.

This crisis is just beginning.  It is going to play out over time, and it is going to be very messy.

The following are 8 more reasons why you should be deeply concerned that the U.S. government has lost its AAA credit rating….

#1 The U.S. dollar and U.S. government debt are at the very heart of the global financial system.  This credit rating downgrade just doesn’t affect the United States – it literally shakes the financial foundations of the entire world.

#2 As the stock market crashes, investors are flocking to U.S. Treasuries right now.  However, once the current panic is over the U.S. could be faced with increased borrowing costs.  The credit rating downgrade is a signal to investors that they should be receiving a higher rate of return for
investing in U.S. government debt.  If interest rates on U.S. government debt do end up going up, that is going to make it more expensive for the U.S. government to borrow money.  The higher interest on the national debt goes, the more difficult it is going to become to balance the budget.

#3 We could literally see hundreds of other credit rating downgrades now that long-term U.S. government debt has been downgraded.  For example, S&P has already slashed the credit ratings of Fannie Mae and Freddie Mac from AAA to AA+.  S&P has also already begun to downgrade the credit ratings of states and municipalities.  Nobody is quite sure when we are going to see the dominoes stop falling, and this is not going to be a good thing for the U.S. economy.

#4 10-year U.S. Treasuries are the basis for a whole lot of other interest rates throughout our economy.  If we see the rate for 10-year U.S. Treasuries go up significantly, it will suddenly become a lot more expensive to get a car loan or a home loan.

#5 The current financial panic caused by this downgrade is hitting financial stocks really hard.  The big banks led the decline back in 2008, and it looks like it might be happening again.  Just check out what CNN says happened to financial stocks on Monday….

Financial stocks were among the hardest hit, with Bank of America (BAC,
Fortune 500) plunging 20%, and Citigroup (C, Fortune 500) and Morgan Stanley
(MS, Fortune 500) dropped roughly 15%.

#6 China is freaking out. China’s official news agency says that China “has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets”.  If China starts dumping U.S. government debt that would make things a lot worse.

#7 There are already calls for the Federal Reserve to step in and do something.  If the U.S. economy drops into another recession, will we see more quantitative easing?  It seems like we have reached a point where the Fed is constantly in “emergency mode”.

#8 The U.S. national debt continues to get worse by the day.  Just check out what economics professor Laurence J. Kotlikoff recently told NPR….

“If you add up all the promises that have been made for spending
obligations, including defense expenditures, and you subtract all the taxes that
we expect to collect, the difference is $211 trillion. That’s the fiscal
gap”

Dick Cheney once said that “deficits don’t matter”, but the truth is that all of the debt we have been piling up for decades is now catching up with us.

The United States is in such a huge amount of financial trouble that it is hard to put into words.  The days of easy borrowing for the U.S government are starting to come to an end.  We have been living in the greatest debt bubble in the history of the world, and it has fueled a tremendous amount of “prosperity”, but now the party is ending.

A whole lot of financial pain is on the horizon.  Please prepare for the hard times that are coming.

The Economic Collapse

Rick Santelli of CNBC, the man who ignited the fire for the Tea Party, vents his spleen about the blame game going on in Washington….and he’s precisely right.