Friday, March 12, 2010

Going from broken to broke

CNN Money had a very interesting article on health reform today. Most reasonable people agree that our system needs to be improved. But exactly how, and how to pay for it is still a hot debate...

President Obama is claiming that his health-care plan will substantially lower future deficits. Naturally, it's the huge budget shortfalls that cause the debt problem by forcing the U.S. to borrow more and more money to bridge the gap between spending and revenues. For proof, he cites the CBO report from March 11 forecasting that the Senate bill -- the basis of the president's proposal -- will pare the deficit by $118 billion over the next decade.
That forecast, however, doesn't mean that what the CBO counts as lower deficits will lead to less debt, as taxpayers might expect. In fact, it appears that it would require the Treasury to borrow almost 40 cents of every dollar in new spending the bill requires.
How to lower a deficit and raise a debt
It's not an easy trick to reduce deficits and yet borrow more money. CBO does it because it has to. By law, the CBO is required to use "cash" or "unified budget" accounting. Under that system, the CBO projects all the new revenues and new expenses from the legislation it's requested to "score." If the extra revenues exceed the additional outlays, the bill is deemed to reduce deficits. That's the case with the health-care bill. The rub is that the measure gets a large portion of its revenues from new Social Security and Medicare taxes -- plus levies it collects upfront to pay for a long-term care entitlement program.

Counting those taxes as deficit reducers presents two problems. First, the extra revenues are mainly needed to pay for higher benefits in the future. Second, they cannot be used to fund the lavish subsidies, tax credits for small employers, and other spending the bill mandates. "The law is clear," says Donald Moran, a former Reagan Administration budget official who runs a Washington, DC-based health-care consulting and research firm. "Revenues from those entitlement taxes must go into their trust funds. That money is not available to pay for the spending commitments of the health-care bill."
So let's use the definition of "deficits" that most Americans follow in their own budgets: Any time you increase spending -- on buying a two-story colonial or taking a vacation at Club Med -- and you need to borrow to pay for it, you're running a deficit. For families, the best way to measure those deficits is the amount it adds to what you owe on their credit cards, car loans or home equity lines.
Now apply the same standards to the health-care bill. If it really reduces deficits, it should lower the federal debt. It does the opposite. How? First, it doesn't raise nearly enough revenues to pay for itself. Second, it vastly understates future costs.

see the full report on