Missing the Debt

Published July 21, 2011

National Review Online

The ongoing debt-ceiling debate (unlike most past increases of the debt ceiling) has involved negotiations about various avenues to deficit reduction. That’s not only because Republicans have the leverage to demand something in return for raising the limit, but also in large part because the debate comes amidst grave worries about our mounting debt, and warnings from creditors and rating agencies about where it’s headed.

The warnings are based on the unprecedented projected trajectory of the debt. Here is how the CBO sees it going, compared to the scope of our national debt in the past:

The debt will be larger than our entire economy in just a decade (a level we have experienced only once, very briefly, in the immediate wake of World War II) and will continue to grow very quickly into utterly unchartered territory.

The debate about policy changes attached to the debt-limit increase is supposedly about how to avoid this fate. But in fact, the debate has had basically nothing to do with the causes of that trajectory. Because our budget debates look ten years into the future (since congressional budget rules require 10-year budgets), we have been able to sustain the illusion—on the left and on much of the right—that what we’re dealing with is a familiar kind of public finance problem, if on a larger scale than usual: We have had an explosion of discretionary spending in the past few years combined with increases in entitlement spending, and taxes have not risen to match, and so we’re debating whether to cut spending down to the levels of our tax revenue, to raise taxes to match the spending explosion, or to do some combination of the two. That’s the familiar fiscal debate—everybody knows his part, and has basically played that part this year. It’s an important debate. But it is the debate of yesterday’s and today’s debt problem, not tomorrow’s debt problem—not the medium and long-term problem that is the source of that crazy debt trajectory that has everyone worried.

That debt explosion—which will be at the heart of our politics in the coming years—is different and unprecedented, and we have seen in recent months that the Left is completely unprepared to understand it, and the Right (with much help from the indispensable Paul Ryan) is only starting to grasp it.

Simply put, that debate is all about health-care entitlements. And I mean all. Last month, the Congressional Budget Office released its most recent long-term outlook document (from which the chart above is taken), and with it they released the underlying data tables they used to produce their projections (which you can find here). Here’s a quick chart based on those tables, showing the components of federal spending over the coming decades:

The red line consists of the health-care entitlements: Medicare, Medicaid, SCHIP, and the new Obamacare entitlements. The blue line consists of everything else combined—including Social Security, defense, domestic discretionary spending; everything but interest on the debt.

Looking at a chart like this, the eye naturally jumps to the point where the two lines intersect—and it’s true: starting in the 2050s, CBO projects that health-care spending will be greater than all other non-interest spending combined, and the federal government will basically be a health insurer with some unusual side ventures like an army and a navy. But the important thing to note here are the trajectories of the two lines. Total health-entitlement spending today is 5.6 percent of GDP. By just 2035, it will be more than 10 percent, while all other federal spending combined will actually decline as a percentage of GDP (from roughly 17 percent today to 14.5 percent), because it will grow more slowly than CBO’s projection for economic growth. By 2050, health spending will be up to 13 percent of GDP, and all other spending combined will decline further (to 14 percent).

Now, CBO’s notion that all other spending will decline as a share of the economy is based on some fairly rosy projections for economic growth, which are unlikely to materialize if (as they also project) our debt will balloon to more than twice the size of our economy in that period. But the relationship between the two lines would be roughly the same in any case. In other words, health-care entitlement spending is basically 100 percent of our medium and long-term debt problem. The crazy slope of the red line is the reason for the crazy slope in the first chart above, and for all the worry about American debt at home and abroad.

In the short-term debate we are now engaged in, we are fighting about ways to reduce deficits with lower discretionary spending or higher taxes—basically using non-health spending to offset some of the growth in health spending in the hope of keeping overall deficits and debt under control for a little while longer. But in the medium and long term, there is no hope whatsoever of doing this. It is absolutely impossible to raise taxes fast enough or high enough to keep up with this growth, and while other entitlement and discretionary cuts can buy a little time there is really nothing we could do on that front that would effectively avert disaster, both for the health-entitlement programs and for the economy. As President Obama himself said earlier this month, “If you look at the numbers, then Medicare in particular will run out of money and we will not be able to sustain that program no matter how much taxes go up.”

Unfortunately, however, the president is not willing to do anything about this. The Medicare reforms he was reportedly willing to consider—raising the Medicare retirement age by two years, employing yet more price controls, a little more means testing—just don’t get anywhere near the real problem. Taking the two healthiest age cohorts out of an expensive insurance system doesn’t save you real money—CBO says raising the Medicare age to 67 would only reduce the program’s spending by 2 percent over ten years, since Medicare won’t be spending its trillions on 66-year-olds. Price controls are the problem, not the solution—they drive doctors to segment their work and provide more services rather than higher quality. The president’s notion of means testing just involves slightly higher premiums in Medicare parts B and D for wealthy seniors—that is, higher taxes rather than a change in how the system works, and by the White House’s own admission this would save almost nothing.

Our debt explosion is a health-entitlement explosion, and to address it we have to fix the fundamental structure of our health entitlements. That means above all replacing the fee for service structure of Medicare, which is the chief driver of inefficiency across our health-care system. In addition, the incentives for overspending in Medicaid (where states design benefits and the federal government pays) and the employer system (where higher premiums mean greater tax savings) need to be redirected. That means repealing Obamacare and transforming the employer tax exclusion, Medicare, and Medicaid into a system of defined-contribution health benefits.

That doesn’t mean a debt-ceiling deal has to address all this. It would be unreasonable to expect that. But it does mean that by failing to address it, such a deal would fail to really touch the debt problem. Any deal that fails to do that (even if it’s called a “grand bargain” and claims to involve trillions in cuts over ten years or is hailed as the epitome of sanity by gang members) is not a meaningful debt-reduction plan, and is not worth huge concessions from Republicans, like a multi-trillion dollar tax increase. It would be, rather, a small spending-reduction deal and would be worth small concessions from Republicans, like a less than 1-to-1 relationship between cuts and a debt-ceiling increase, or some similar compromise. The equivalent of a huge tax concession (which would shatter the Republican coalition, but which Democrats consider essential) is a huge health-care concession (which would shatter the Democratic coalition but which Republicans consider essential), but the president has insisted that those are entirely off the table. If that’s the case, then taxes should be too, and it’s time to finalize a smaller deal.

A small deal is worth making, but Republicans are right to keep it in perspective, and they should save their resources and their major cards for doing what it takes to deal with the new and difficult kind of policy challenge the country now faces. And doing what it takes apparently includes helping elect a new president, since the current one insists on doing all he can to avoid meaningful reform of our health-care entitlements.

Daunting as it is, such reform is achievable. Here’s a third chart from CBO’s data, contrasting the current trajectory of health-entitlement spending with the one House (and most Senate) Republicans voted to adopt earlier this year:

It can be done. And of course the specific approach of the Ryan budget is by no means the only way to do it. The reforms proposed by the Bipartisan Policy Center last year, or those proposed by the Breaux-Thomas commission back in 1999 offer less aggressive but also perfectly plausible paths to a solution. All of them involve a transformation of Medicare into a premium-support system that would use market forces to improve efficiency and keep costs down. The same logic applied to the individual and small-employer markets would also help cover more of the uninsured and further reduce the growth of health-care costs. That’s the shape of the solution to our health-care problem, and therefore to our debt problem. It is the core of the answer to the unprecedented challenge that we now face, and which our politicians are doing their best to avoid.

If we solved this problem, we would still have too big a government and much spending to cut, but we could argue about that in the traditional way—by seeking some balance between spending and taxes. Our coming fiscal problems are just not amenable to that sort of approach. By debating one another as though that were not the case, as though the familiar old dynamics of our fiscal-policy debates still hold, our leaders are ignoring the debt problem, not addressing it. And by calling such dereliction a grand bargain and showering themselves with garlands for considering it, Republican leaders risk undermining their party’s own efforts to actually address the debt problem and allow our country to prosper in the coming decades.

Yuval Levin is Hertog Fellow at the Ethics and Public Policy Center and editor of National Affairs.

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