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David Brodwin's blog

Budget Battle Deja Vu

With efforts to repeal Obamacare all but dead, the 2018 budget has taken center stage. It's easy to let your eyes glaze over on this, but don't: The proposed House budget dramatically reallocates both national priorities and taxpayer dollars.

The politics of the budget bear an uncanny resemblance to those of the health care bill, and the outlook for budget legislation may not be much better. Too many conflicting promises have been made to too many different factions. The GOP health care proposal aimed to make good on multiple promises: to repeal Obamacare, to NOT repeal the parts of Obamacare that people liked (for example, protecting people with preexisting conditions) and to cut government spending on health care so as to pave the way for future deep for tax cuts. Ultimately these three objectives proved irreconcilable and the repeal effort halted.

On the budget front, Congress and the president have again made mutually exclusive promises: to cut taxes, to increase defense spending, to not impair Medicare and certain other entitlements, and to not increase the federal deficit. Without resorting to magical thinking, it's simply impossible to do all four of these. The equivalent for a homeowner would be something like this: take a lower paying job, remodel the kitchen, don't steal money from the kid's college fund and don't run up credit card debt. It just doesn't work.

Faced with this impossibility, the proposed budget goes half way and then makes misleading assumptions to conceal the likely results. Yes, it cuts income taxes, mainly to highly paid individuals and corporations. It increases defense spending, by much more than what the president requested. It cuts many other programs, consistent with President Donald Trump's campaign promises, and then goes further to cut Medicare, which Trump promised to protect.

The proposed budget claims to eliminate the federal budget deficit within 10 years. But in order to zero out the deficit, the budget makes the wildly optimistic assumption that the U.S. economy will grow 2.6 percent per year, whereas most economists think 1.9 percent to 2 percent is much more realistic. That may not seem like much of a difference, but the economy is so huge that a small difference in its growth rate makes a big difference in federal income, and hence the deficit. Under realistic assumptions, the deficit balloons to about $1.4 trillion instead of shrinking to zero (according to Congressional Budget Office estimates).

The numbers are so big they are mind-boggling to imagine. But let's try to get a sense of the scale of the changes. As of 2016, the federal government raised $3.3 trillion and spent $3.9 trillion, so the deficit was the difference between these two numbers, or about $300 billion.

Government revenue will fall under the proposed budget as taxes are cut. In 2018, the tax cuts would amount to $62 billion, which is a relatively small portion of total taxes collected (about 3 percent) though nearly all the cuts go to corporations and the top brackets.

Defense spending goes up by about 6 percent. It is now about 15 percent of the federal budget.

Mandatory social spending (also called "entitlements") includes Social Security, Medicare and Medicaid. This is the largest portion of federal government spending – about 62 percent. This would be knocked down by about $200 billion or 8 percent. Social Security is not cut explicitly, and the cuts fall mostly on Medicare and Medicaid. But Social Security could be cut implicitly by such measures as raising the retirement age.

The next category is called "Non-defense discretionary" and you can think of it as "everything else." In other words, it's what is left over in the budget after subtracting defense and the mandatory spending. This part of the budget takes a huge 24 percent reduction which will affect a lot of programs that many people depend on. Some of these cuts – like student loans -- will hit the middle class hard, and others like nutritional assistance hit the poor.

Finally, the way reconciliation works, this budget provides a means to kill certain regulatory programs without formally and explicitly repealing them after public debate. For example, the Dodd Frank financial regulations could be scaled back or killed under the argument that the government can't afford the cost of implementing and enforcing them.

Different camps within the Republican Party have already staked out opposing positions on the budget, The battle lines are very similar to those in the health care fight. The House GOP Freedom Caucus opposes the proposed cuts to Medicare and Medicaid, saying they don't go far enough. Meanwhile the centrist Tuesday Group of roughly 50 moderate Republicans in the House opposes the same cuts because they go too far and will cause too much pain for constituents. Either the House factions will find a way to compromise with each other, or they will have to seek allies on the Democratic side to get a budget passed.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report July 24, 2017.

Health Care Is a Market Failure

This week, the U.S. Senate rolled out its version of Obamacare repeal, called the "Better Care Reconciliation Act." The bill would brutally strip coverage from many millions of Americans, while raising costs and reducing coverage for tens of millions more. And it redistributes the money gained by stripping coverage mostly to people who already have a lot of money, and already have access to great care.

But even if you think taxes need to be cut and it's OK to strip coverage from people, there's a lot to dislike about the bill. It does nothing to solve the most important problem with U.S. health care, which is its grotesquely high cost structure. And as a result, the Senate bill fails to relieve the burden that our health care system places on national competitiveness and profits for nearly every major U.S. businesses (except the few that feed at the trough of this broken market).

The fundamental problem with our health care is straightforward: It costs way more than it should relative to what it delivers. We can say this with confidence because we know what each developed country pays for health care. And we know what each country experiences in terms of average life spans, infant mortality, disability and so on. Let's act like smart shoppers and compare what health care costs versus the outcomes that it delivers, country by country.

When we shop around, we learn that the U.S. spends about 17 percent of GDP on health care, while getting outcomes that are no better and in many cases significantly worse than in other advanced nations. Our infant mortality rates, for example, are near the bottom of the pack. Meanwhile, other developed countries spend 8–12 percent of GDP on health care. We're spending roughly twice as much money and getting nothing for this extra cost.

Whatever you may think about this from humanitarian grounds, you should be concerned about the broader effects of this on the economy, on businesses and on the U.S. competitive position. Warren Buffet called medical costs "the tapeworm of American economic competitiveness" and he's right. After Obamacare is repealed, sick people will still go to the hospital, and the hospital (constrained by both law and decency) will not turn them away. But who will pay the hospital for treating these uninsured patients?

The cost will fall mainly on American corporations: The hospital will mark up its rate structures to cover treating the uninsured; they'll get away with it because they face little competition. The health insurance company will raise their rates to cover the higher hospital costs, and America's businesses get the bill. But consider that most U.S. businesses compete on a global market (though not the proverbial ice cream parlor on Main Street). In the world of international competition, if the U.S. medical system costs 17 percent and the rest of the world's costs about half that, then U.S. corporations need tack on an extra 8 percent or so on to the price of everything. That translates directly to lost market share, lost jobs, lost profits.

These losses reverberate through the economy and end up cutting into tax revenues that the government needs to operate, even in the most lean, libertarian version of government. When companies lose share and profit, they pay less corporate tax and their CEO's and investors make less money. As a result, the government collects less tax at any given tax rate. And so, even as Congress touts tax savings from slashing Medicaid, much of that tax savings will soon evaporate due to erosion of the U.S. competitive advantage.

None of this is to say that Obamacare got it right. Ironically called the "Affordable Care Act," Obamacare made health care more available but did nothing to make the overall system more affordable. It too shied away from taking on the fundamental restructuring that our health care system needs. But the Senate's proposal shreds the "available" part while doing nothing to create a system we can all afford. That's a cop-out that both conservatives and liberals should refuse to accept.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report June 23, 2017.

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