Tag: deficits

–Cuts to Medicare vs deficit spending

An alternative to popular faith

I just received a note from Mark Kirk, Republican Congressman, listing the cuts to be made in Medicare. I don’t know how factual they all are, because frankly the new program not only is complex, but evolving.

In any event, this is what the Republicans (and Democrats) should work on, rather than the “repeal and replace” political effort that has no chance to succeed. Forget the McCain, “There will be no cooperation for the rest of the year” attitude. Focus on correcting the negatives rather than throwing out the baby with the bathwater.

By the way, every one of these cuts could be eliminated if wrongheaded, deficit paranoia were eliminated. The federal government can and should pay, via deficit spending, to eliminate all these cuts. Consideration of real damages to real people should take precedence over imaginary, unproven damage from federal deficits

Here is what Rep. Kirk wrote:

“2010: Medicare Cuts to Hospitals: The federal government will reduce Medicare reimbursements for hospitals who provide seniors with long-term and inpatient and rehabilitation care.

2011:Medicare Advantage Cuts Begin: Approximately 121,000 Illinois seniors will be dropped from their chosen Medicare Advantage coverage. Drug Discounts for those in Medicare Part D “donut hole” begin: The federal government will impose a new requirement on pharmaceutical companies to provide a 50% discount on “brand name” prescriptions. Increased Medicare Part D Premiums: Seniors with incomes above $85,000 for individuals and $170,000 for couples will be forced to pay higher Medicare Part D premiums. Medicare Imaging Cuts: The federal government will cut Medicare reimbursements for seniors who use MRI and CT scans. Medicare Cuts to Ambulance Services and Durable Medical Equipment: The federal government will begin cutting Medicare reimbursements for seniors who use ambulances or durable medical equipment.

2012: Medicare Cuts for Hospitals with Readmissions: The federal government will cut Medicare reimbursements to any hospital with a high readmission rate. Medicare Cuts for Hospice Care: The federal government will cut Medicare reimbursements for seniors on hospice care. Medicare Cuts for Dialysis Care: The federal government will cut Medicare reimbursements for Americans – both youth and seniors – on dialysis.

2014: Medicare Board Cuts: The federal government will establish an Independent Payment Advisory Board with powers to make further cuts to seniors on Medicare.

2015: Medicare Home Health Cuts: The federal government will cut Medicare reimbursements for seniors who depend on home health care.”

I’d be interested in hearing from those of you who think reducing federal deficits is more important than eliminating these cuts, together with your evidence that deficits are harmful in any way.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

–Debt “unsustainable” no longer.

An alternative to popular faith

        Just when I thought the Chicago Tribune was starting to get it, they ruined everything. For years, the Tribune has told its readers the federal deficits and debt are unsustainable, that China and the other nations would refuse to lend to us, that the government would be unable to service its debts and that federal taxes needed to be increased or spending reduced.
        And because the federal debt is unsustainable, the government is not able to support Medicare, Social Security, Medicaid and universal health care without significant tax increases or benefit cuts.
        Then I saw this in the March 30, 2010 editorial titled, “Debt Dangers”:“But the U.S. is not about to run out of money, even if it keeps overspending. Why not? First it can appropriate more of its citizens earnings through the tax system. Second and most important, it can print money to pay its bills.”
        Wow, is the staid, old Tribune finally starting to understand? Do they realize the government can support Medicare, Social Security, Medicaid and universal health care, even if taxes are reduced? Do they understand we don’t need China and the other nations to lend to us, because we can create money without borrowing?
         Sadly we were not to be so fortunate, for a few sentences later, the editorial said, “The danger is that (the government) would create money to make those debts payable, a course that would lead to much higher inflation.”
        Never mind that today, following the most massive deficits in our history, the government’s chief worry is deflation, not inflation. Never mind that for the past forty years, there has been zero relationship between deficits and inflation, and in fact, the largest deficits have corresponded with inflation reductions. (See the graph, below).

Debt vs inflation

        And never mind that deficits repeatedly have proved stimulative, while reduced deficits are depressive. Intuition and popular faith trump facts every time.
        Then the Tribune editors compounded the crime by stating, “The economy would also suffer as businesses and households scrambled to cope with the disruptive effects of soaring prices. It would suffer again if and when the government decided to curb inflation by driving up interest rates — a step that virtually guarantees a sharp downturn.”
        Never mind that high interest rates have not slowed GDP, nor have low rates stimulated, which is why the Fed’s twenty rate cuts failed to prevent or cure the recession. (See the next graph. If high interest rates slowed GDP, the peaks of the blue line would have to correspond with the troughs of the red line.)

InterestratesvsGDP

         But at least, the Tribune has taken the first step, and perhaps we never again shall see that ridiculous sentence, “The federal debt is unsustainable.”

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

–Another attempt to explain the positive effect of deficits

An alternative to popular faith

I’m searching for a way to explain that contrary to intuition and to what the media and politicians say, large federal deficits are good, not bad. Please read this and tell me whether you believe its clear enough for non economists.

The federal government is unique, far different from you, me, businesses and local governments. Its finances, particularly its deficits may seem counter-intuitive. You may have three fundamental questions about federal deficits:

1. Are large deficits unsustainable? Is there a time when the government will not be able to service its debts?

2. Do large deficits have an adverse effect on the economy?

3. Are large deficits beneficial?

Unsustainable: Visualize a scenario where there are zero federal taxes. The federal government has no income, yet sends you, “Mr. Lucky,” a check for $10 trillion dollars. You will deposit the check in your bank.

Will the check bounce? No. Your bank will credit your account for $10 trillion, then send the check to the Treasury, which will credit your bank and debit its own balance sheets for $10 trillion. You now have $10 trillion in your account, allowing you to buy a few thousand Rolls Royces or the State of Montana, whichever you prefer.

The government can debit its balance sheet and credit your bank, endlessly. The balance sheet is just a score sheet with a number. Whether that number is $10 trillion or $100 trillion makes no difference to the score sheet. The only limit is the artificial “debt limit,” on which Congress votes periodically. There is no functional limit on what any balance sheet can read. The government can write a check of any size, despite zero taxes.

Taxes may be levied for several reasons, but supplying the government with spending money is not one of them. The government creates money by spending. It does not use tax money. Therefore, all federal debt is sustainable.

Adverse effect: One possible adverse effect often mentioned is taxes. (“My children and grandchildren will have to pay for today’s deficits.”) But, we just saw that taxes do not pay for deficit spending. We are the children and grandchildren of the Roosevelt and Reagan eras. We never have paid for those monster deficits. The mantra about children and grandchildren is a myth.

A second possible adverse effect is inflation. Contrary to popular faith, inflation is not “too much money chasing too few goods.” That is an obsolete slogan. Today, we live in a world economy. Given sufficient money, there never can be too few goods in the world to sell. Instead, inflation is loss of perceived money value compared to the perceived value of goods and services.

The phrase, “too much money chasing too few goods,” addresses only supply. Inflation however refers to supply and demand, for money and for goods and services. The demand for money can change without a change is supply, and is related to interest rates. The demand for goods and services can change similarly, but generally increases when money supply increases.

Since we went off the gold standard, in 1971, there has been no relationship between deficits and inflation. In fact, the largest deficits have corresponded with the lowest inflation. See the graph, below:

Instead, inflation has corresponded with oil prices. See how inflation and oil prices move in concert, but oil moves much more, indicating oil prices are “pulling” inflation. (See the chart, below) Oil is the one “good” that can be in short supply and affect the prices of all other goods and services.

Oil prices and inflation

Despite the fact that large deficits have not caused inflation, I suspect there may be a point at which truly gigantic money supply growth could lead to inflation. We’re just nowhere near that point, as witness the current deflationary concerns.

At any rate, if inflation ever did crop up, the government would increase interest rates to increase the demand for money.

Beneficial: New York, a large economy, needs more money than does Peoria, a smaller economy. In fact, by definition, large economies need more money than do smaller economies. So for an economy to go from smaller to larger, its money supply must grow.

If you feel economic growth is beneficial, you also must feel money growth is beneficial. Federal deficit spending is the way the government adds money to the economy to make it grow. Federal deficits are beneficial.

–//–

Does this seem like it would be clear to the average person? What are your suggestions?

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

–Health care: The tragic misunderstanding

An alternative to popular faith

On March 20, the Wall Street Journal’s editorial, “The ObamaCare Crosswords” said, “The Congressional Budget Office estimates ObamaCare will cost taxpayers $200 billion per year when fully implemented and grow annually at 8% . . . Soon the public will reach its taxing limit . . . medicine will be rationed by politics. . . “

On March 22nd, the Chicago Tribune editorialized, “The health care reform legislation would raise, not lower, federal deficits by $562 billion . . .(there is time) to craft a more sensible compromise that extends health care coverage to more people without breaking the bank.”

Which bank? Do you mean the federal government, which has increased its debt in the past 30 years an astounding 1,400%, from $800 billion to $12 trillion, yet never has had, and never will have, any difficulty whatsoever in servicing its debt? Or do you mean the taxpayers, already suffering, but whom debt hawks will require to send additional money to a federal government that neither uses nor needs the money?

The Tribune’s solution: “Our choice would require insurers to take all comers but give them a big new customer base: American who now don’t have health coverage but who don’t need an overhaul this expensive in order to get it.” And who are these Americans? They fall into two main categories: Lower income people who can’t afford health insurance and people who have pre-existing health problems.

To assist the former would require insurers to lower rates, thus increasing premiums for everyone else. To cover the later would require insurers to accept greater risk and provide greater payouts, thus again increasing premiums for everyone else.

The strange belief that a federal government, which repeatedly demonstrates it has the unlimited ability to create money without inflation, suddenly would have difficulty servicing additional debt, has caused otherwise intelligent people to lose their ability to reason. Though our government continuously has proved it can service a debt of any size, taxpayers are limited in what they can service. So, why do respected media editors prefer tax increases to federal debt increases, especially when increasing federal debt stimulates the economy?

Contrary to media demagoguery and popular faith, taxpayers do not pay for federal spending. When the government spends, it merely reaches out and credits the bank accounts of its creditors. There is no limit to the government’s ability to activate these credits, which are not in any way affected by tax receipts. If all federal taxes were eliminated today, the federal government’s future ability to spend would not change by even one penny.

The confusion comes because the federal government is unlike you, me, companies and state, county and local governments. We all must obtain money to spend money, and we are limited in our ability to obtain money. By contrast, the federal government creates money out of thin air, with no limits. Taxpayers are not involved in the process.

Astute politicians are aware of the disconnect between taxes and spending, which is why Vice President Cheney, in an unguarded moment, famously said, “Deficits don’t matter.” But politicians, knowing the public believes taxes pay for spending, and not wanting to appear imprudent, go along with the myth.

We could have a health care program in which doctors, nurses and hospitals are well paid, pharmaceutical companies are incented to create new drugs, and all Americans receive optimum health care. Instead, wrong-headed budget concerns have taken precedence over human health concerns, leaving us with a crazy-quilt, inadequate health care bill.

The current plan is to take money from Medicare, from doctors, nurses and hospitals, from employers and from those who currently pay for health insurance. What a terrible, unnecessary human tragedy we have created, all because of ignorance about federal budgets.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com