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2018-01-01 01:00 by Karl Denninger
in Health Reform , 360 references Ignore this thread
The Impossible Mismatch
[Comments enabled]

It's really not all that complicated when you dig into the headline that has just started showing up -- and which I predicted would bite before the end of Trump's first term.

2018 could be the year the dam bursts on the federal deficit.

Back in June, the Congressional Budget Office projected that the budget deficit — government expenses exceeding revenues — would drop to $563 billion in 2018 from the $666 billion shortfall the Treasury Department declared in the 2017 fiscal year, which ended Sept. 30.

Now budget experts outside government say the 2018 total could exceed $1 trillion because of series of bills being passed in quick succession, and decisions to scrap what were already weak limits on spending.

The CBO is always off -- on the low side.  That's not because they try to be off, it's just a function of how the CBO works; they are constrained by the rules Congress sets for them on how to evaluate things, which forces them to use existing law projected forward without any likely, or even nearly-certain, legislative changes.

In other words if a budget change expires in 5 years they're required to assume that it will indeed expire, even if the legislative history strongly suggests it will not.  If the Medicare "Doc Fix" has taken place every year (and expanded the deficit) they may not consider that in the following years because it has not "yet" passed -- even though historically it has passed every year in the previous decade.

Last fiscal year, by the way, was the first one in a long time when the debt addition actually was close to the "official" deficit; it was just over $670 billion (where the claimed deficit was $666.)

What does a trillion dollar deficit mean?

In a $20 trillion GDP economy (assuming you believe GDP actually captures economic activity) it means a 5% devaluation of the purchasing power (that is, inflation) of every single dollar in existence.  In other words if we put up a 3% GDP number it's actually -2%.

The problem all comes from Medicare and Medicaid.  To recap -- Medicaid is a pure entitlement; there is no offsetting tax.  There is for Medicare, which is 2.9%. 

Politicians always lump "Social Security" and "Medicare" in together when talking about "entitlements" but this is an intentional fraud run upon you and when they do so you should either insist they cut that crap out or force them office whether peacefully or piecefullyas there is no Social Security problem.

That's because Social Security has a "buffer" of Treasuries that are issued against the "excess" tax receipts.  The system was designed this way so that when there were "lumps" of people (e.g. the Boomers) the money would be there to pay their benefits.  Those people will die, and when they do that drag on the system will dissipate.  I remind you that this is 12.4% on earnings, from the first dollar, up to the cap -- and that benefits are capped as well, and in fact you get more back for lower-earning dollars than higher ones.  That is, Social Security is a progressive tax in that those who earn more get less for each dollar contributed.  While the Boomers will indeed deplete the Social Security bond stash as it is cashed in and spent they will then die and the drain on the system will stop.  In short there is no issue with the retirement fund -- there is, however, an issue with Congress raiding retirement funds in order to support ridiculous expansion of unearned Social Security disability payments, and this must be halted.

Medicare, on the other hand, is funded with a 2.9% tax on earnings (and has no cap.)  The problem is that this was designed to mesh with an economy in which health care spending was about 4% of GDP.

Today health care is almost 20% of GDP, or five times larger on a proportional basis, despite technological innovation that should drive down cost.

That hasn't happened because of monopolies and racketeering all of which is illegal under more than 100-year old law.  It starts with the American Medical Association (AMA) which has built itself a monopoly business in the ICD and CPT "code lists" for diagnostics and just gets worse from there.

What this imbalance has done, along with the government trying to cap Medicare spending (by setting "reimbursement rates") is force that spending into the "private sector" -- that is, on you.   This is only partially effective, particularly in the area of drugs where Medicare Part "D" was forbidden to negotiate drug prices when it was passed by Congress.

Then came Obamacare, and suddenly the soft underbelly and truth became exposed.  If you made less than about $40,000 (whether intentionally or not) you got subsidies that, in many cases now, exceed $700 a month for a single person.  In other words you get "free" health insurance.  If you actually use health care this is robbery of the public on a grand scale to the tune of more than $10,000 a year but if not you can "opt out" of the scam -- for now -- at near-zero or zero cost by reducing your income to the roughly $20,000 a year level.

However, make more than about $20,000 and the effective tax rate on your earnings until you reach the $40,000 threshold is in the neighborhood of 80%!  Do the math -- first you lose the entire subsidy, so that's now about $10,000 you must pay for said "insurance" right off the top.  That's a 50% effective tax rate to which you must add Social Security and Medicare (15.3%) and then income tax (~15% bracket, plus whatever your state has, if you have a state income tax.)  The effective tax rate thus is 80% on that next $20,000 in income if you live in a zero-state income tax state like Florida and for most states where income tax in the $20-40k bracket has hit the "nominal" rates in the 5% range it's 85%!

In other words earn one dollar, get to keep 15 cents.

Do these people think I'm nuts?  More to the point $40,000 is hardly a "rich" lifestyle and it's much worse when you work hard enough to "make" $40,000 but only live as if you made $23,000 because the rest is taxed away with $10,000 of that taxing coming from the loss of Obamacare subsidies!

I can easily surpass the point where that "knee" drops back off, but realize that until you get into the hundreds of thousands of income that nasty in the $20-40k range is an extremely ugly marginal tax boost.  At the $100,000 level it adds a full ten percent to your effective tax rate.  Those who think they're in the 20% bracket are not -- they're paying 30%.

The worst part of this is that virtually everyone who works for someone else and has a full-time job is paying this tax too but it's hidden from them and exactly none of Trump's so-called "tax cut" helps in this regard.  That's because their employer is "required" to provide said health insurance or get fined, so they pay.  You don't see it, the CPI index doesn't capture it but it's there.  We were seeing this at MCSNet in the 1990s with 10%+ escalations annually and it's still going on.  Employers inevitably cut back the plans to try to manage that cost but that eventually runs into the mandatory coverage requirements and thus there's only so much you can do.

There is only one way to stop this and prevent the escalation from detonating the Federal Government's budget -- and that is to return medicine to 4% of GDP.  If we do that then the Federal Government never runs a deficit and in fact runs a surplus immediately and permanentlyState and Local governments stop getting hammered and thus your property taxes go down instead of up, pension plans that include health benefits prior to Medicare stop being bankrupted in an afternoon and you get a real pay raise of about 15% immediately as well.

But there's a problem -- all that theft and scam comes out of the economy and millions of people who profit from and in fact are employed as a direct result of it now are temporarily unemployed.  In the year you fix it GDP plunges by that same 15%.  A 10% decline is the formal definition in economics of a Depression, so we get one.

It doesn't last long -- in fact it lasts for mere months before the economy will adjust -- but those months, if you're one of the people who make their living as a result of this robbery, are very bad for you.  It's also bad for the stock market and any business that is on the public markets and exists only because of these scams; those firms are all literal zeros.

Of course politicians would get blamed, which is why they won't do it.  But if we don't as a body politic demand that this scam be kneecapped, now, the increasing cost escalation will destroy the federal budget, will destroy state and local budgets and will destroy you financially if you're not super-wealthy -- and no, the "ordinary wealthy" with a million or two will not escape this.

You may think we can get away with trillion dollar deficits because the economy and stock market are doing "well" today.  You're wrong because if it's a trillion now when the next recession comes, and it will, it won't be one trillion -- it will be two or three trillion at which point the federal government's ability to fund itself will collapse.  There are plenty of people who believe The Fed can "QE" its way out of this again, but that's false -- there is a limit to that chicanery where you no longer are in the market but effectively are the market, and The Fed has already tickled that dragon's chin.

Wake him up and he eats you.

Time's up folks; if you expect Medicare to be around 10 years from now and beyond this has to be fixed right now or the outcome is certain: Medicare and Medicaid will collapse.  It is a mathematical certainty.

Medicare is in fact self-funding and perfectly ok if we collapse medical spending back to 4% of GDP.  We can do this without losing access to medical care or destroying the industry by enforcing 100+ year old anti-trust law against all medical providers and throwing those who refuse to comply in prison.  We can start here, and then pass this immediately following and the problem will be immediately and permanently solved.

If we do not demand this now as Americans then the outcome is certain -- and it's going to suck.

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