Shutdown Hysterics And Debt Drama Queens: What Happens Next?

Shutdown Hysterics And Debt Drama Queens: What Happens Next?
October 23, 2013

Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)

After all the dire predictions of doom and gloom, all the hysterics and drama queens, the end result of the great government shutdown/debt limit battle was no real substantive change, except for one, big, fat, new, debt loophole for the power mad President Obama.

The great Obamacare oppression, which will end up denying more health care than it delivers before it is repealed and replaced, prevailed unchanged.  Obama and the Democrats fought off equal treatment for members of Congress and their staffs with the American people, maintaining their special Obamacare benefits and exemption not available to the rest of us.  They fought off equal treatment for workers with big business, refusing to delay the oppressive individual mandate as Obama granted illegally by decree for the employer mandate for businesses.  Even though Obamacare was not ready for prime time.

House Republicans passed over and over bills that funded all of the government except Obamacare.  Democrats demonstrated that they would rather shut down the government than lift the oppression of Obamacare from the backs of the American people, as the people have long favored.  Democrats favored their increasingly Leftist ideology over the public interest.

But at the same time, the final funding agreement that did pass funded the government through January 15 at current levels of spending, with no change in the sequester/budget cap spending cuts that Obama and the Democrats have bewailed all year.  Those sequester/budget cap cuts reduced total, actual federal spending for two years in a row, which has not happened since the end of the Korean War 50 years ago.  President Obama and the Democrats have been grossly exaggerating the pain of those spending cuts, which the American people have not even noticed, all year, calling for the spending cuts to be replaced with still more tax increases.

But current law remains in effect under this deal, which means the sequester will on January 15 reduce the current level of federal discretionary spending from $988 billion to $967 billion.  President Obama overconfidently agreed to those sequester/budget cap cuts as part of the 2011 debt limit increase deal, thinking Republicans would humiliate themselves as phonies ultimately backing down from the cuts.  Obama was shocked when true to their word, they embraced the spending cuts, which is why he has been trying to reverse them ever since.

Under those sequester spending caps, new federal spending has been shut down for the rest of Obama’s Presidency, which is why he has been so anxious to repeal and replace them.  That is what the Republican House majority was elected to do, shut down the runaway Obama Democrat spending spree of Obama’s first two years, when Democrats overwhelmingly controlled both Houses of Congress.

But Republicans caved on the debt limit, agreeing to grant Obama the power for unlimited borrowing without limit until February 7.  Obama has been able to borrow trillions at historic low interest rates, because the Fed with his approval has been printing money to buy federal bonds to pay for that borrowing.  That is just laying the groundwork for a future financial crisis, which the Democrats and their party controlled media will then blame on Wall Street again.  But the Washington Establishment does not recognize this problem.  More on that in a future column.

In other words, Obama does not have to limit his borrowing over the next 4 months just to cover the deficit during those months.  He can borrow a trillion more than necessary, and more, and just spend it during the rest of the year, and beyond.

That authorization for a period of unlimited borrowing was apparently the price that Senate Minority Leader Mitch McConnell had to pay to keep the sequester/budget cap cuts in place, which are scheduled in current law to keep cutting federal spending for the rest of the decade.  That was the deal that House Speaker John Boehner won in the 2011 debt limit battle.  McConnell’s wisdom in preserving that already won victory even at the price of unlimited Obama borrowing for a few months was good judgment in my opinion.  Those who dissent can be asked, what did you do to prevent Obama from being reelected in 2012, and the Democrats from increasing their Senate majority, even though they had more than twice as many Senate seats at stake that year than the Republicans.

What is coming next is a debate about the long term budget, entitlement reform, and tax reform.  A bipartisan Congressional budget committee created under the recent deal as well is scheduled to report on that by December 15, renewing debate at least through the new January 15 government funding deadline, and the February 7 debt limit reappearance.

President Obama and the Democrats are demanding still another tax increase for the long term budget, even though they have already won two major tax increases this year.  One is the expiration of the Bush tax cuts for the nation’s job creators, investors and small businesses, increasing tax rates for virtually every major federal tax, while maintaining the highest marginal corporate tax rate in the world.  The second is the sweeping Obamacare tax increases, which also went into effect in January.

That, and Obama’s oppressive regulatory policies, and the Fed’s weak dollar, negligible interest rate, monetary policies Obama also cheerleads, are the reasons for the long term job stagnation, persistently declining middle class incomes, and soaring poverty that have prevailed since Obama has been President.  Not the 2008 financial crisis 5 years ago (which was also caused by big government policies long supported by Obama himself).

House Budget Committee Chairman Paul Ryan, the Republicans, and enlightened Democrats have a better, bipartisan idea – revenue neutral tax reform, closing loopholes in return for lowering rates.  Ryan’s tax reform would include just two income tax rates, 10% for families making less than $100,000, and 25% for income above that.  The federal corporate rate would be reduced from 35% to 25% as well.  House Ways and Means Chairman Dave Camp (R-MI) is working on that, with Senate Finance Committee Chairman Max Baucus (D-MT).

This would greatly help restore traditional American economic growth, which would create jobs, increase middle class incomes, and reduce poverty.  But Obama has fundamentally transformed America, which means we no longer have that.

Long term, structural, positive, populist entitlement reform can contribute mightily to long term economic growth as well.  That means instead of trying to trim this or that benefit for the poor and seniors here and there, which is never going to amount to much, fundamentally reforming the way the entitlement programs operate.  That can produce better and higher incomes and benefits for the poor, seniors and the sick, while actually cutting federal spending in half over the long run from where it would be otherwise.  This is based on reforms already proven to work in the real world.

The 1996 welfare reforms sent the federal funding for the old, New Deal, Aid to Families with Dependent Children (AFDC) program to each state in fixed, finite, block grants, which was originally a Reagan idea going back to his days as Governor of California.  Instead of the federal government matching federal spending on AFDC, with the Feds effectively paying states to spend more on the program, the reform left states with the same federal funding regardless of how much they spent.  States with now virtually complete authority to revise the program would pay all of any increased costs themselves, but keep all of any savings from getting program dependents to work.  Under those reformed incentives for state bureaucrats, two thirds of AFDC dependents went to work, and their incomes were documented to increase by 25% on average.  Yet, after 10 years the cost of the program was half of what it would have been otherwise on prior trends.

Those same reforms can and should be extended to all of the federal, means tested, welfare programs, including Medicaid, food stamps, and housing assistance.  They can all be sent back to the states with the same authority and incentives as under the 1996 AFDC reforms.  Those programs are estimated to cost over $10 trillion over the next 10 years.  This one reform can consequently save trillions, while actually ultimately eliminating poverty in America, as I explain in Chapter 5 of my book America’s Ticking Bankruptcy Bomb, published by Harper Collins.

As a result, instead of taxpayers paying trillions to the bottom 20% of the income distribution (though income is produced, not distributed) not to work, private employers would be paying them much more to work, and thereby contribute to economic growth and prosperity for all.

For health care, Obamacare can be repealed and replaced with the NCPA Health Care for All Plan.  (John Goodman and Peter Ferrara, Health Care for All Without the Affordable Care Act, Issue Brief No. 116, October 17, 2012, John Goodman and Peter Ferrara, A Health Care Contract With America, Issue Brief No. 110, July 26, 2012).  That plan assures health care for all, unlike Obamacare, which teased universal coverage but is scored by CBO as still leaving 30 million uninsured 10 years after implementation!  Moreover, the NCPA plan does so with no individual mandate, no employer mandate, a trillion dollar tax cut, and at least $2 trillion in reduced spending, over 10 years.

That results from repealing Obamacare, and expanding the tax benefits for employer provided health insurance to everyone through a universal health insurance tax credit for the purchase of private coverage.  Everyone would then get the same tax benefit, about $2,500 per person, or $8,000 per family, for the purchase of private health insurance, which would be free from onerous Obamacare regulation such as guaranteed issue, community rating, and federally mandated benefits.  That credit can be used by everyone and anyone for the purchase of HSA coverage, proven highly effective in controlling health costs (unlike anything in Obamacare, which only subsidizes and drives higher health costs).

For a safety net, the plan would block grant Medicaid back to the states, with the states then free to provide health insurance vouchers to help the poor pay for the private health insurance each chose, on top of the universal health insurance tax credit, which again can include HSAs.  That would help the poor enormously, as they would get better health care with private health insurance instead of Medicaid, with a savings of at least $1 trillion over 10 years, as scored by CBO for the idea as included in the Ryan budgets.

The poor could also use the Universal Health Insurance Tax Credit to opt out of Medicaid entirely.  But anyone could also use that credit to opt into Medicaid if they desired, as it is equal to what CBO estimates is the cost of Medicaid covering an additional person.  That assures that health coverage would be available to anyone, including those with pre-existing conditions.  Moreover, each state would be free to use part of the Medicaid block grant to fund a state high risk pool for the uninsured who became uninsurable due to the onset of a costly illness while uninsured, which would charge premiums for coverage based on ability to pay.

Consequently, under the replacement plan, everyone would have access to health care, including the poor, the sick and working people, with vastly reduced taxes, vastly reduced spending and vastly reduced regulation.  Each would choose their own health insurance, instead of the government forcing what it chooses on them.  Through HSAs, interstate health insurance competition, and tort reform, the plan would also reduce the rapid growth of health costs, again contrary to Obamacare.

Finally, positive, populist entitlement reform would include the freedom for all to choose personal savings, investment and insurance accounts for Social Security and Medicare, on the enormously successful model pioneered by the South American nation of Chile 30 years ago.  Since a lifetime of savings and investment will always earn and pay more than a lifetime of no savings and investment, which is Social Security and Medicare, seniors would be assured of much higher retirement benefits, rather than benefit cuts.  Indeed, through such accounts, each worker would be free to choose his or her own retirement age, rather than the government imposing one uniform, politically chosen age on everyone, with market incentives to delay retirement as long as possible, and earn even higher benefits.

This would amount to the biggest reduction in government spending in world history, as the functions of Social Security and Medicare would be served by private savings, investment and insurance, instead of federal taxes and spending.  And it would contribute mightily to economic growth and prosperity, with hundreds of billions flowing into capital markets each year, complementing the bottom 20% of income earners joining the work force.  The above reforms would finance the transition to these personal accounts, out of the spending savings they would produce.

Small minded prisoners of the status quo, are you ready to think outside the box, for freedom and prosperity for all?

Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)