CBO Says We’re Between a Rock And a Hard Place

Interesting report released yesterday by the CBO. While it still depends heavily upon the static analysis that I’ve criticized so often in the past, it does still show the hard choices we’re going to have to make in the very near future.

In short, the report says that if the Bush tax cuts expire on January 1, then we will have a short recession in 2013. I think they’re optimistic about the length of the recession, especially taking into consideration external factors such as the economic crisis in Europe, but it’s not a pretty picture regardless.

Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.

However, the CBO says that if the Bush tax cuts are extended, then GDP growth for next year will be around 4.4%. That’s extremely optimistic, considering the current state of the economy and the pace of the “recovery” we’ve had so far. I merely present it as a data point from which to judge the rest of their projections.

Unfortunately, extending the Bush tax cuts is not all sunshine and rainbows, according to the CBO. Since they believe that such an occurrence will limit tax revenue, they see this as a problem down the road. I can’t say it any better than the CBO did, but I will bold some key points:

If all current policies were extended for a prolonged period, federal debt held by the public—currently about 70 percent of GDP, its highest mark since 1950—would continue to rise much faster than GDP.

Such a path for federal debt could not be sustained indefinitely, and policy changes would be required at some point. The more that debt increased before policies were changed, the greater would be the negative consequences—for the nation’s future output and income, for the burden imposed by interest payments on the federal debt, for policymakers’ ability to use tax and spending policies to respond to unexpected challenges, and for the likelihood of a sudden fiscal crisis. And the longer the necessary adjustments in policies were delayed, the more uncertain individuals and businesses would be about future government policies, and the more drastic the ultimate changes in policy would need to be.

The CBO is going to keep hammering this home (and so will I), until someone other than Congressman Paul Ryan (R-WI-01) gets it. The economic path President Barack Obama (D-USA) has put us on leads to financial ruin. And we are very far down the path. Every day we delay doing something about it a) makes it harder to solve, and b) makes the required solutions more drastic.

Now, the CBO thinks that we can avoid this financial ruin by raising taxes. But, unless we can raise taxes to 30% of GDP without destroying the economy (we can’t), then the CBO is wrong. We may need to raise taxes. But we absolutely need to lower spending. And, until we commit to doing the latter, there’s no point in even considering the former.

One final point: politicians, regardless of party, who are ignoring this problem or pretending it doesn’t exist are endangering the future of America. These people must be stopped. Quickly. This is what the elections this November are all about. It’s very simple. You can either vote for America, or against it. The time to choose is now.

Path to Prosperity 2012 Version

Congressman Paul Ryan (R-WI-01) released this year's version of his Path to Prosperity this week. I give him credit for it, but it's really the work of the House Budget Committee, which he chairs. This will be the starting point for the 2013 budget prepared by the House of Representatives. The Senate is required to prepare their own budget, but they won't. The Senate Majority Leader is a spineless, lying, sniveling coward, who knows that a budget prepared by Democrats would destroy their party.

But, I digress.

This year's version shares quite a bit with last year's version. It greatly simplifies the tax code, and cuts the corporate tax rate to 25% (which is still 25% too high, sadly--but at least it's identical to the top marginal rate). And, based upon CBO's conservative growth estimates, it balances the budget around 2040. Which is far too slow, but I'll get back to that later. Obviously, it also assumes pretty much a complete repeal of ObamaCare.

The major differences lie in two areas: Medicare & Medicaid, and dealing with the sequester. The Medicare/Medicaid section is quite a bit different. Not sure if it's better or worse, but different. Ryan clearly understands the heat he & the Republicans took on this issue last year and is trying to address it in a more palatable way. This part is the same as what was released last year and is commonly called the Wyden-Ryan plan for Medicare, co-authored with Senator Ron Wyden (D-OR).

The heart of the Wyden-Ryan plan is to use competitive bidding to allow private insurers to compete with traditional, 1965-vintage fee-for-service Medicare. If you want to learn more about competitive bidding, see this piece I wrote about Mitt Romney’s proposal for Medicare reform. If that doesn’t quench your thirst, you can read the definitive book on competitive bidding:Bring Market Prices to Medicare, by Robert Coulam, Roger Feldman, and Bryan Dowd.

The basic idea behind competitive bidding is that, say, on a county-by-county basis, you let private plans and traditional Medicare offer plans with the same actuarial value compete, to see who can offer the same package of benefits the most efficiently. Each plan in a given county will name a price for which they are willing to offer these services, and seniors are free to pick whichever plan they want. However, the government will only subsidize an amount equal to the bid proposed by the second-cheapest plan. If you want a more expensive plan, you have to pay the difference yourself.

I have some concerns with this, like what happens when private insurers can't compete with an unfunded government plan, but overall, at least Ryan can't be accused of pushing grandma off a cliff. Also, this clearly is an arrow to the heart of IPAB ("death panels"), one of the most offensive parts of ObamaCare.

As for Medicaid, this section appears to be unworkable to me. Funds are fixed based upon an inflation and population index. That assumes that healthcare services remain static. Generally, not only have healthcare services increased in price, but also in quantity. You're offered a lot more healthcare choices today than you were 50 years ago. In other words, there are more opportunities for you to spend your hard earned dollars on healthcare related costs. This is one of the reasons programs like Medicare and Medicaid always expand beyond expectations. It doesn't seem like to me that the Ryan plan would deal with that, leaving further Medicaid burdens on the states. Maybe that's ok. But I know it'll be a criticism from the left.

Finally, the other significant change in the Ryan plan this year is dealing with the sequester. From the actual doc:

Reprioritizing sequester savings to protect the nation’s security:  The defense budget is slated to be cut by $55 billion, or 10 percent, in January of 2013 through the sequester mechanism enacted as part of the Budget Control Act of 2011. This reduction would be on top of the $487 billion in cuts over ten years proposed in President Obama’s budget. This budget eliminates these additional cuts in the defense budget by replacing them with other spending reductions.  Spending restraint is critical, and defense spending needs to be executed with effectiveness and accountability. But government should take care to ensure that spending is prioritized according to the nation’s needs, not treated indiscriminately when it comes to making cuts. The nation has no higher priority than safeguarding the safety and liberty of its citizens from threats at home and abroad.

As an aside, Ryan points out that the entire $400B of "savings" from President Obama's (D-USA) plan comes from shredding the military budget (emphasis mine).

Yet,  the defining characteristic of the President’s new defense posture is a reduction in the administration’s own defense plan from last year, bringing the total reduction to $487 billion over the next ten years. This number stands out as significant for several reasons. In the President’s latest budget proposal, total spending increases by $1.5 trillion and taxes increase by $1.9 trillion, for a total of around $400 billion of deficit reduction over ten years. A clear‐eyed look at the numbers reveals that American taxpayers and the Department of Defense are being asked to bear the entire burden of deficit reduction under the President’s budget.

Overall, as I said last year, the Ryan plan is a good start. But it still has areas that concern me. In no particular order:

1. There's no way to bind future Congresses to his plan. So, really, any budgetary saving after FY2013 must be taken with a grain of salt. However, with our baseline budgeting, it would establish the "baseline". So, future Congresses would have to explain why their future budgets differ from the baseline. For once, baseline budgeting could play in our favor. Maybe.
2. Spending vs. GDP (based on CBO forecasts) is still too high. It's still over 20% GDP through 2030. That is unacceptable. The President's "plan" never drops below 25% GDP and is nearly 40% GDP in 2050. As I have mentioned numerous times in the past, the President is ignoring our impending financial crisis. The best you can say about his plan is that it may kick the can down the road a bit. Let me repeat this for what seems like the thousandth time. Our impending financial crisis is real, huge, and unavoidable. And the longer we wait to deal with it, the worse it's going to be. We can do something now and maybe have a soft landing, that won't be too terrible. Or we can destroy the economy for a generation or more. The President has chosen the latter. That last statement is not hyperbole. It's not even opinion. It's demonstrable fact..
3. It takes too long to balance the budget (based on CBO forecasts). The budget isn't balanced until 2040. That is also unacceptable. And unrealistic. And disappointing. But it shows the depth of the 2008 financial crisis and how much worse the current White House occupant has made things. It may take decades to undo the damage that he has done to America.
4. Finally, a minor quibble, but I don't think Path to Prosperity is a good name for the document. It's truthful, but not a powerful enough statement. It should be called. Path From the Brink or something. Perhaps even Saving America From Bankruptcy.

Ok, that's the bad news. There's some good news. All of the economic projections are based on low growth estimates from the CBO. That includes the spending vs. GDP projection and the deficit projections. Ryan has released a supplemental document called "The Budgetary Impact of The Path to Prosperity Under Alternative Growth Scenarios". The tax reform and budgetary reform outlined in the plan should act as a giant shot in the arm to the economy. Also, moving towards deficit and debt reduction will make investors less skittish and increase economic investment, which will also boost the economy. Finally, corporations with profits sheltered outside of the U.S. will be allowed to invest this money back in the U.S., further stimulating economic growth.

Currently, U.S. companies have an estimated $1.4 trillion parked offshore and are reluctant to repatriate those funds back home due to the significant taxes that could be incurred under the current U.S. tax system.7 A worldwide tax system essentially locks this money out of the U.S. economy, where – if it were repatriated – it could be used to fund investment, business expansion and job creation in the United States. Policymakers on both sides of the aisle have proposed a temporary repatriation tax holiday in order to give businesses an incentive to send these funds home and put them to work in the U.S. economy. A switch to a territorial tax system would give U.S. businesses a permanent incentive to do exactly that.

This three pronged economic stimulus package (and it actually really would be one), makes the CBO's low growth estimates far too limiting.

In its range of estimates, CBO found that the economy under The Path to Prosperity could be 1 percent larger in 2030, 3 percent larger in 2040 and 6 percent larger in 2050 relative to its long-term base case. By contrast, under the path implied by the extension of current tax and spending policies, the econ0my would shrink by as much as 10 percent in 2030 and 28 percent in 2040. In other words, the difference in outcomes between these two trajectories could sum to as much as 11 percent of total economic output in 2030 and over 30 percent of output in 2040.

[...]

A larger and faster-growing economy leads to significantly higher revenue than the base case. This higher amount of revenue, when compared to the spending levels outlined in The Path to Prosperity, leads to a much-improved fiscal path. Assuming higher growth within the range cited above – percentage-point increases of 0.5 (lower-bound AGS), 0.75 (mid-point AGS), and 1.0 (upper-bound AGS) – the budget could achieve balance in the mid-to-early 2020s, with the upper-bound growth assumption producing budget balance within the ten-year budget window – much sooner than CBO’s estimated balance date of 2039.

In the spirit of a picture painting a trillion words, see below. The red line is the President's "plan". Based on his plan, you can expect total economic collapse sometime between 2030 and 2050. By "total economic collapse", I mean that you should consider an event like the Great Depression as a best case scenario.

I have a couple more posts on this plan coming up. I think they'll be a bit shorter. I want to hit a couple sections of the document and point them out specifically, as I think Ryan makes some incredibly important points that aren't being made elsewhere, or at least aren't being made loud enough.

Democrat On Entitlements

I hope you’ve seen this video by now:

 

Simon Rosenberg beclowns himself in epic fashion. You see his disdain before he even says a word. It’s obvious on his face that he doesn’t want to be there, and is looking for an excuse to get out.

Another abdicator, just as I said. I saw this earlier today, and spent my drive home and part of the evening trying to come up with something pithy and witty to say about it. But Ed Morrissey at HotAir sums it up better than I ever could have thought about doing:

Actually, this is practically a paint-by-numbers primer on the Democratic strategy on entitlement reform. Step 1: Declare that the Republican plan will kill people. Step 2: Denounce demagoguery. Step 3: Offer no plans of your own. Step 4: Feign offense when challenged on strategy. And finally, Step 5: Walk off in a huff without doing anything.

He whines from the beginning that he’s not allowed to speak, but he doesn’t let Ferguson speak either, so that’s all obviously just for show.

Attack and abdicate. It’s the Democrat way.

Scott Brown Jumps Off The Path To Prosperity

So, Senator Scott Brown (R-MA) has decided to vote No on Congressman Paul Ryan’s (R-WI-01) Path to Prosperity. I’m not surprised or even disappointed in that. I predicted events like this back in January, 2009.

But don’t start believing that Brown is the answer to everything. He’s not. In a few years, if he’s still around, many will be complaining about what a RINO he is. Well, guess what? If you want a Republican elected in MA, or ME, or NY, s/he’s probably going to be a RINO. Even Rudy Giuliani (R-NY) qualifies at least on social issues.

What does disappoint me are his reasons.

First, I fear that as health inflation rises, the cost of private plans will outgrow the government premium support— and the elderly will be forced to pay ever higher deductibles and co-pays. Protecting those who have been counting on the current system their entire adult lives should be the key principle of reform.

Ryan agrees. That’s why his plan makes no changes for people over 55.

Second, Medicare has already taken significant cuts to help pay for Obama’s health care plan. The president and Congress cut a half trillion dollars to the private side of Medicare — meaning seniors are at risk of losing their Medicare Advantage coverage.

Again, Ryan agrees. In fact, he’s stated unequivocally that the only people that want to cut Medicare are Democrats, and that they’ve already done so with ObamaCare. Also, as I said above, his plan makes no changes for people over 55. So seniors are at no more risk of losing anything with the Ryan plan than without.

What’s important is that we get started now and, where appropriate, phase changes in over time. This phase-in should be another principle of reform: give our future seniors enough years to adjust to the “new normal.”

Ryan agrees. In fact, this is exactly what his plan does.

I have made boosting jobs, reducing spending and repairing our economy my top priorities in the Senate. I plan on continuing to work with people of goodwill - in either party - to solve the very real problems we face. Our country is on an unsustainable fiscal path.

Still in 100% agreement with Ryan here.

And he closes with:

This is not the time for finger-pointing or the usual blame game. For every reckless decision - on both sides of the aisle - that led us to this point where we are $14 trillion in debt, we now will have to make a hard decision to help get the country on the right track.

That track must lead to a sound financial future — where we protect and provide for the elderly while also promoting fiscal responsibility.

Does he realize that he’s pretty much quoted Paul Ryan in every thing he’s said here?

Look, I can handle voting against the plan. I never thought he’d be a solid conservative anyway. But, when you claim that you can’t vote for it because what you’re looking for is something exactly like the plan, then you either haven’t read the plan or you’re lying.

Neither of the above is acceptable. And that’s what surprises, disappoints, and angers me.

The Path to Prosperity (Episode 2)

I keep saying this. The GOP needs to adopt President Barack Obama’s plan. Hit back twice as hard. Point out that it’s the Democrats that want to kill Medicare. Congressman Paul Ryan (R-MN-01) wants to save it.

Watch this video. Then pass it on.

 

The panel he discusses is called IPAB. Read about it here.

Under the law, spending cuts recommended by the presidentially appointed panel would take effect automatically unless Congress voted to block or change them. In general, federal courts could not review actions to carry out the board’s recommendations. The impact of the board’s decisions could be magnified because private insurers often use Medicare rates as a guide or a benchmark in paying doctors, hospitals and other providers.

Even without the “death panels” connotation, this arrangement should offend anyone who believes in accountable government.  The Constitution provides checks and balances between the legislative, executive, and judicial branches, but provides Congress with most of those checks due to its nature as the “people’s branch” of government.  Placing an unelected panel in charge of spending decisions that Congress only can veto — and doing that through the executive branch rather than the legislative branch — offends the very nature of separation of powers.  The Constitution gives Congress the power of the purse, not the President, and the IPAB turns that on its head.

Furthermore, Obama’s promise does push the IPAB further into “death panel” territory because of the nature of its mandate.  It’s not an Independent Accountant Advisory Board, looking for bad fiscal practices to clean up.  The IPAB exists to determine what kind of health services Medicare should and should not provide as a way to save money.  That inevitably means that significant numbers of people on Medicare won’t get the care they desire, and thanks to the single-payer system and the fact that the government has already taken the money for those premiums, most of those will have little choice but to suffer more and die more quickly as a result.  Obama’s pledge to strengthen their power to make those cuts makes the issue even more urgent.

Yes, death panels are back, but with a fancy sounding name.

ObamaCare is truly evil. Doing nothing about the problems we face is just as evil. As I said yesterday, Democrats are going to keep ignoring the problem until it starts affecting their constituents, and then they’re going to look for someone to blame. Facing the problem and doing something about it is not in their DNA. Fortunately for us, it is in Paul Ryan’s DNA.