Debt and deficit 101 (part the third and mercifully final)

Debt and Deficit 101, last gasp

        We hear a great deal of Republican bitching about “entitlements,” and there is no question that these mandatory budget items are a large chunk of the whole,  The use of the word, however,  is somewhat offensive as used because it is often delivered as if the money was somehow an undeserved government gift. Let’s take the two largest, one at a time:

Social Security:

       Social Security mandatory spending comprises more than a third of mandatory spending and around 23 percent of the total federal budget. Medicare makes up an additional 23 percent of mandatory spending and 15 percent of the total federal budget. (More on Medicare later). The issue with Social Security is easily understood even if unpleasant. More of us are living longer. Period. However, as large a driver of the current cost is that fewer workers are paying in (relative to those drawing out) than ever before. The Baby boomers, that huge population “bulge” of the late 40s and early 50s are now drawing Social Security, beginning about 2010. 

       In the 1950s, the number of children per family averaged more than 2 and was 2.44 in 1965. It is currently below 2. This is meaningful because, while more persons are living longer, fewer workers are paying into Social Security. In 1945, for everyone drawing SS, there were 41.9 workers paying into the system. By 1950, that number was 16.5, and in 2000, there were just 3.9 workers paying in per recipient, and those recipients were living longer.

        The “good news” is that, as boomers move through the system to whatever cosmic muffin they may think comes next, the “workers to recipient ratio” will eventually improve. That’s if we just wait. 

       So, when Trump speaks, as he has, of ending employers’ payroll tax contributions to SS, (50% of contributions) he threatens the system permanently. As the ratio of workers to seniors evens out, even if nothing else is done, the SS shortfall percentage of the budget will decline somewhat.

        The above eventual demographic change will, eventually, lower the SS related deficit, but there is another factor at work which was not only foreseeable, but avoidable with proper Congressional action.  In 1940, (SS was established in 1936), the percentage of males reaching 65 was 53.9%; for women slightly higher at 60.6%.  with medical advances and better living conditions, those figures in 1990 were 72.4% for men and 83.6% for women. Not only were more Americans every year gaining SS eligibility age, but men were living (and drawing benefits) for an average of 3 years longer for men and 5 years longer for women!

        One obvious (although undoubtedly unpopular) “fix” would have been simply to look at the data and realize that retirement age should have  been adjusted upward, perhaps a year at a time each decade since 1950, grandfathering those in the decade. Two or three iterations of this adjustment would have considerably moderated the current situation. Another fix which could (and should, IMHO, be implemented is either eliminating “early” retirement or moving it upward from 62 to 65. It also of course, true that increasing the SS portion of the payroll tax could accomplish the same thing.

        Another radical fix, but consistent with the original intent of the program would be adding more rigor to “disability” claims. As the law was originally structured, there was no such thing as “Social Security disability”. It was enacted in 1956 during a period of economic growth and signed into law by President Eisenhower. Even then, at first the program provided monthly benefits only to disabled workers between the ages of 50 and 65 who met certain requirements for insured status. Most are aware now that obtaining dubious SS disability has become a cottage industry for lawyers. Few are aware that the original proposals for Social Security rejected disability but did propose national health insurance, which was lobbied against by the AMA! A conservative estimate of disability fraud is about $50 billion annually! 

 Medicare/Medicaid:

       This is an easy fix, but one which will take the will to do the right thing in the face of intense lobbying and political pressure.   

        Private insurers negotiate far lower than “retail” prices for hospitalization, procedures and drug prices. Every time one gets a statement of benefits there are the “fee charged” and “fee paid” columns. So, one asks, if the medical professionals are willing to accept less, why even mention the higher “asking” price? The answer lies in those who have no coverage and are required to pay the list price. There is one of several big lies told by those who oppose national health care such as Medicare for all, and it’s a whopper: “Well, Medicare pays less, so hospitals would suffer.” Guess what Jethro; every private insurer in America pays less, and in the odd instance even less than Medicare. The problem is that the “lower negotiated price” which applies to essentially every medical issue and procedure doesn’t apply in one critical area – drug prices.

        I’ve covered this in other essays, but for the uninitiated, when Medicare Part D (drug plan) was created, intense lobbying from Big Pharma resulted in the stipulation that Medicare/Medicaid would pay full “list price” for all drugs and  that all drugs, regardless of expense, would be available to all patients covered under either program. It must be noted that all other federal programs bargain much lower prices, while Medicare/Medicaid cannot.

  

       Stay with me here for a couple of examples and a rather startling conclusion”

       The total price (Medicare part D and copay) for an EpiPen 2 pack is $700. The Veteran’s Administration pays $183 for it! If EpiPen is prescribed, Medicare will pay even though the Pharmacist would offer the generic equivalent. Likewise, Medicare patients can’t take advantage of reduced-price coupons. The manufacturer’s cost to produce is $30! Yes, that’s a 2300% profit if the patient’s drug plan is Medicare.

        High end drugs are even worse. Stelara, a Godsend for those with chronic ulcerative colitis or Crohn’s disease, retails at about $22,000. I take it for Psoriasis. My drug plan, also federal, but Tricare for military retirees (not Medicare!) pays $6700 for precisely the same drug. Yes, Medicare pays 3.2 times as much as any other insurer.

        How did we get to this ridiculous abuse? Former Congressman Billy Tauzin, R–La., who steered the bill through the House, retired soon after and took a $2 million a year job as president of Pharmaceutical Research and Manufacturers of America (PhRMA), the main industry lobbying group. Medicare boss Thomas Scully, who threatened to fire Medicare Chief Actuary Richard Foster if he reported how much the bill would actually cost, was negotiating for a new job as a pharmaceutical lobbyist as the bill was working through Congress. 14 congressional aides quit their jobs to work for related lobbies immediately after the bill's passage. Ahh, the power of lobbyists!

        Ok, Ok, but how does this relate to the deficit? That’s what we were talking about, right? Assume that Medicare could negotiate the same reduction in drug costs as private insurance does, which would require the Congress to "grow a set," tell the Pharma lobby to fuck off,  and repel the “no bargaining” provision of part D.

       Medicare drug spending for 2019 was about $700 billion with another $64 in Medicaid drug bucks.  Using a conservative estimate (remembering many drugs cost Medicare/Medicaid more than 3 times the cost to all other providers), let’s assume bargaining costs could reduce spending by only 60% (it’d be more more) annually. For 2019, that would have meant a savings of $458 billion!  Economist Joseph Stiglitz in his book entitled The Price of Inequality estimated a "middle-cost scenario" of $563 billion in savings for the same budget window.

        In plain terms, the same Republicans (and, to be fair, some Democrats) who whine incessantly about entitlements, which are overwhelmingly Medicare/Medicaid and Social Security, have, and have always had, it within their power to reduce the impact of the two largest (by far) non-discretionary repeating chunks of federal spending. 

        “Fixing” Social Security is a long- term effort which will, to an extent, self-correct as the population demographic shifts as boomers move through and beyond. 

       Drug pricing, however, could and should be immediately addressed, fairly, with no negative effect on patients, by simply levelling the playing field between Medicare and all other insurers. The savings on Medicare/Medicaid drug costs alone would have negated three of the last four Obama deficits!

        Before you even think about concerning yourself about the welfare and profits of big Pharma, know that, as an industry, Pharma, and health care in general, is the most profitable as a group of any US industry, and it isn’t close. In one recent year Pfizer actually posted a 47% NET profit! Annual net profits of 25 to 30% are common industry wide. As for the rest of the business world, most US corporations would consider a 6% annual net profit a great year. That’d be a down year for a Pharma firm. Remember, they’re already selling to Canada and the UK cheaper than here at home. And no, they aren’t losing money on any sales.

A brief Tax reprise:       

       in review and summary,  I wouldn’t suggest that higher marginal tax rates are a cure-all but, it is worthy of note that historically, there is a great gap between what conservatives want and tell us will happen, and what actually results when the highest marginal tax rates are lowered. This largely follows the question “Who gets hurt and who “makes out”? 

        Historically, as I showed at some length, there tends to be an inverse relationship between the size of federal deficits and high earner marginal tax rates. Generally, the higher the upper marginal tax rate, the lower the deficit because of higher revenues. That isn’t economic theory, it’s a statistical fact. Even so, this has resulted in others like Ronald Reagan, a fiscal dunce, in pressing, against the advice of multiple economic advisors, but at the urging of voices of those who stood to make even more excess profit, for a tax cut. Result? – the Reagan recession. 

       In 2017, the Trump administration passed a tax cut ballyhooed as (insert typical Trump superlative here). Immediate results have been years of increasing deficits during what Trump insisted was the best economy anywhere in the universe.

        It’s a simple concept, really, if you spend more than you make, your debt increases. It then becomes a question of “What do you value?” This results in such pathetic efforts, especially in the current administration, as whining about the cost of food stamp programs (about $60 billion) while ignoring abusive drug pricing costing 10 times more.

So, there you have it, budget and deficit are manageable, but priorities matter. If making rich donors richer becomes more important than sound economic policy, we will end up ….where we are.