Evanescence,
There is no silver bullet. The process will take a lot of time. The first step would be to slow the increase in the rate at which the nation's debt has been growing. The second step would be to stabilize that debt. The last step would constitute debt reduction. In doing so, there will always be a level of social welfare, investment, national security, among other functions, that the federal government needs to undertake. The federal government cannot be "run like a business" because the interests in governance are far broader than those of a business (social, economic, financial, safety, etc., vs. financial/economic for businesses). The government can apply some lessons i.e., become far more focused and efficient.
IMO, the larger the federal government becomes, the less efficient it can be. I think of FEMA as an example. During the Katrina disaster, FEMA purchased hundreds of trailers from businesses like Clayton Homes, and then the trailers sat in lots where they remain to this day. Of course, there are so many examples of gross inefficiency concerning the Katrina disaster, but what stands out to me the most is how private charities and individuals were able to accomplish so much more than the government. If one applies the same logic to the government on a grander scale such as national security and the general welfare of the county, the government is largely ineffective because of corruption and inefficiency.
IMO, a credible fiscal consolidation strategy will have to involve:
1) Social security reform: A fairly simple actuarial problem. Current retirees would largely be held harmless. The eligibility age would be raised for future retirees and then pegged to changes in life expectancy. The payroll tax cap would be raised to the original level (share of income) and pegged that share of income. Benefit increases (for future retirees) would be tied to the cost of living, not wages.
Since the cost of living is constantly increasing, wouldn't that increase social security liabilities even with the eligibility age requirement increased? I guess that would depend on how fast the cost of living increases. My concern is inflation-even hyperinflation.
2) Medicare/Medicaid: Very complex. Savings would depend on fundamental health care reform. Unless the health system's excessive cost growth problem is addressed, Medicare/Medicaid reform won't be viable. One could convert the programs to vouchers, but then the problem would be that the recipients' vouchers would provide increasingly less coverage (underinsurance/uninsurance) on account of rapidly rising health costs. One could impose strict budgeting, but that would lead to rationing based on expenditures (effectively simulating underinsurance/uninsurance). As a result, neither vouchers nor strict budgeting would fix the programs in the absence of fundamental health reform, except at unacceptable costs of effective underinsurance/uninsurance.
Policy reforms would include permitting Medicare to negotiate drug prices, etc. In business, firms use their purchasing power to leverage better deals. It is remarkable that Medicare is not permitted to do so. Reimportation of drugs should also be permitted. Prohibitions are anti-competitive and they essentially protect price disparities from arbitrage. In the securities markets, if a share of a company's stock is trading at a higher price in London than in New York, one would witness buying in New York/selling in London (profitable) until the price disparity disappears. Such a practice is barred when it comes to preventing reimportation of drugs.
Excellent suggestion. I have heard of people buying cheaper drugs in Canada as an example. But imo, I see rationing health care as the only viable option in the long run, even with cheaper drug prices and foreign competition. Health care rationing takes place in most socialized systems. For example:
In England, they have government managed health care:
The NHS cannot, and never has been able to, offer every treatment to everyone who needs it.The NHS is funded from taxes, and it spends more than £42bn every year - £779 for every person in the UK. But it is not a bottomless pit of funds and some treatments have to be restricted. Raising taxes to pay for every possible need is politically unthinkable, as it would require a massive increase in income tax to raise enough revenue to make a significant difference to spending. This means some treatments have to be restricted, or rationed.
It stands to reason that any form of government issued health care, including medicare, will eventually have to be rationed to curve the costs, or taxes must be raised. The most we can hope for is to
slow the rising expenses.
But with privately run health care and HMOs, there is a higher administrative cost associated with health care, and also profit considerations.
Fundamantal health reform would be more complex. Both the demand and supply side would need to be addressed. That means addressing incentives that currently exist for overutilization (copayment structures could be made flexible). It means dramatic changes in technology procurement. It also means reducing competitive barriers i.e., making it far easier for foreign medical providers/hospitals and physicians to practice in the U.S. Other reforms would include tort/medical malpractice reform, licensing reform, etc.
As the article stated, there will always be a higher demand for health care than funds available. Increasing taxes to cover these expenditures is simply not feasible. Rationing is the only viable option in this case. Perhaps, each individual should have a spending cap with no one being able to cost the government more than a certain amount. Of course, this would reduce coverage, but the other option is increasing taxes to cover the expenses. To lower the overall cost of health care is a daunting task to say the least. Even with more competition, the technology necessary to make health care more efficient becomes more costly.
Either way, medicaid and particularly medicare is simply not sustainable in the long term. There are too many people retiring (namely baby boomers) and not enough people in the work force to cover all of the retirees. More people are retiring than entering the work force. Those entering the work force cannot be expected to pay for an entire generation of people retiring, especially as the cost associated with their upkeep continues to rise and inflation eats away at the value of the dollar. Even with the reforms you suggested, (all great ideas, btw) with the purchasing power of the dollar declining, all of the reforms conceivable simply can't keep up with its decline.
3) Tax reform: The tax base should be broadened (elimination of various deductions) so as to generate additional revenue. Even popular deductions should be on the table. In general, if all businesses cannot receive the same deduction, such a deduction is preferential. It distorts economic activity.
My guess is that a credible fiscal consolidation program could stabilize federal debt relative to GDP within 5-10 years. Afterward, a gradual reduction relative to GDP, and later absolute terms, could commence. However, a lot will depend on economic growth and interest rates. Historic experience with fiscal consolidation has shown that consolidation that is largely (but not wholly) spending-driven (2/3 or more of the savings come from spending changes) creates the least economic drag in the short-term. Policy makers should be careful to distinguish between expenditures that are mainly consumption and those that are investments (create future value). Indiscriminate treatment could also tend to cap the nation's long-term growth potential. More robust economic growth leads to faster revenue growth. At the same time, the program has to be credible in terms of substance and perceived as credible by the public. When credibility is lacking or perceived to be lacking, interest rates would wind up higher than they would otherwise be. Higher interest rates would slow economic growth (higher cost of capital) and increase debt service costs. A measure of revenue increases can add credibility, as it could take away concern that a country might not be able to carry through with a magnitude of spending reductions that could be viewed as unrealistic.
Good point, but therein lies the problem. With the bickering that goes on between our vastly ineffective two party system, coming up with a plan to consolidate spending while at the same time encouraging growth seems unlikely. As far as encouraging long term growth, we need more industry. So much of it has left the country in the form of outsourcing. We need an industry that cannot be outsourced, and also can provide people with decent wages that can support a family. My answer to this problem is:
Green energy
Of course, many companies aren't doing too well in this industry, but it's future is assured. I believe this because of peak oil. Eventually, oil will run out. It would be wise of our government to invest in green technology before this happens. Imagine the chaos that would ensue if oil reserves were tapped out, and this energy was no longer available. The US already uses 25% of the world's energy. I really see no reason why the type of technology can't be successful, but more research and development is needed. When green energy is a success, building this new infrastructure and its maintenance will provide many decent jobs for Americans.
Finally, the recent debt ceiling debate revealed enormous problems in the nation's political process. The extent of dysfunction has elevated risks going forward. The other big issue is structural problems in the nation's economy. Unless those issues are addressed by both the public and private sectors, the nation's long-term growth rate will be lower than it would otherwise have been. A 2.5% sustainable long-term growth rate vs. the 3% figure widely assumed in many fiscal projections, would essentially wipe out a significant share of the savings in the recently enacted debt ceiling legislation (revenues would underperform and stabilizers such as unemployment costs would be higher than expected).
The understatement of the year!
And this is where my negativity increases. The so called structural problems are overwhelming, and involve more corruption than people realize. IMO, if the curtain was pulled back, and the corruption of our government and the political process could be seen for what it is, Americans would literally take up arms and storm Washington DC. Luckily for all of the theives, Americans are glued to their tvs.