Commentary

With Spending Plan On The Table, The Legerdemain Can Now Begin

This article appeared in Investor’s Business Daily, February 15, 2006.
image February marks the beginning of a budget cycle that is becoming increasingly predictable.

The president proposes a budget with many spending increases. Some are a shoo-in: Few would dare oppose increases in defense and homeland security during wartime. Others, however, must be disguised as spending cuts in order to silence, and even rally, some gullible fiscal conservatives.

How does it work? Take Medicare spending which is slated to grow by 7.7% a year under the latest budget proposals. The official explanation of the budget, however, claims that Medicare is being cut — by $36 billion over four years, beginning in 2007.

Rather than actual cuts, those numbers represent a slowdown from “baseline” growth of 8.1% a year (see chart). Voila!

This bit of technocratic legerdemain causes the politics to fall into place: The pro- gram’s supporters rise to deliver well-received rhetorical fusillades about the right’s diabolical plan to visit hardship on poorer citizens and frail seniors. Their deafening howls silence fiscal conservatives who ordinarily would rail against the fact that Medicare is growing, on average, about 40% faster than the national economy.

In the end, the conservatives get some of their ephemeral “cuts,” while the liberals continually increase subsidies above and be- yond our ability to pay the bill.

Strife over fake cuts allows Congress and the administration to avoid the heavy lining needed to reform programs such as Social Security, Medicare and Medicaid. In fact, both parties have passed legislation that adds billions more in spending on these programs.

The three major entitlement programs are projected to cost over $50 trillion during the next 75 years. About 70% of this spending is unfunded - that is, it must be financed out of debt-creation that future generations will have to service. Such massive cost overruns will force Congress to raise taxes, siphoning away resources that would otherwise be productively employed.

Medicare and Medicaid costs have been growing rapidly mostly because of a payment system that encourages excess consumption of services for which consumers do not pay out of pocket. A system wherein the government pays the cost but is unable to monitor service provision also invites fraud and abuse and encourages providers to deliver services that are costly but medically unnecessary.

Instead of promoting controls in the form of active consumer participation and cost- sharing, we have adopted a patchwork sys- tem of price-fixing that shirts costs but does not reduce them. And it lowers health-care quality by inducing the best doctors and health-care service professionals to reject Medicare patients.

The president’s proposal for establishing another entitlement reform commission will do little but further delay the inevitable. With 80 million baby-boomers on the cusp of retirement, there is not much time left be- fore the ticking time bomb of entitlement spending explodes. All that another commission would do is parade a plethora of proposals very similar to those of past commissions. Many sensible reform proposals are already available.

All that remains is to find the political will and leadership to get the job done.

Jagadeesh Gokhale is a senior fellow specializing in entitlement reform, labor productivity and compensation, U.S. fiscal policy and the impact of fiscal policy on future generations.