Entitlement Reform, Tea Party Style

New CBO numbers leave no other choice.

by Peter Ferrara

Source: American Spectator

The Tea Party/Republican House majority was elected in 2010 to stop the runaway Obama Progressive Democrat big government spending spree. And it has had a decisive effect in that regard, as recorded in the annual CBO budget report released last week.

Federal spending soared from $2.655 trillion in 2006, when the Democrat Congress was elected to replace the Republican Congress, to $3.6 trillion in fiscal 2011, reflecting the last spending legislation adopted by that completely Democrat Congress in the prior year, an increase of 36% in just four years of control.

But after the new Tea Party/Republican House majority forced a major budget showdown in 2011, total, actual, nominal federal spending actually declined in fiscal 2012 to $3.54 trillion. Such an absolute decline rarely ever happens with federal spending. But for the next 2013 fiscal year, which just ended September 30, it happened again, declining to $3.45 trillion. That is the first two year decline in federal spending since the end of the Korean War.

In the process, total federal spending was slashed from a record peak (except only during World War II) of 24.4% of GDP in 2009 to 20.8% in 2013. That peak is still above the long-term average since World War II. These declines in spending are due to the budget caps and sequester adopted in the 2011 budget deal with the House Tea Party/Republicans.

Similar progress has been made against the deficit. The deficit for the last budget adopted by the full Republican Congress was $160 billion in fiscal year 2007. But the Democrat Congress had raised that to $1.413 trillion by 2009, almost nine times as much, the greatest government deficit in world history, ever. In just five years as President, Obama has borrowed roughly $5.7 trillion, which is larger than the entire gross federal debt in the year 2000, more than debt accumulated under all other American Presidents, from George Washington up until George Bush. Since the Democrat Congress was elected in the fall of 2006, the national debt has doubled.

But the deficit for 2013 is down to $680 billion, less than half of its peak under the full Democrat Congress repudiated in 2010. That is still the biggest deficit in world history, except for under President Obama.

That deficit would have been virtually eliminated by now if economic growth had been restored to where it was during the Reagan boom of the 1980s, 1990s, and into the mid-2000s. Such a boom would have been matched by booming revenues, with further reduced spending. American economic growth in the 1980s was the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the American economy. At the end of the long Reagan Boom, from year end 2002 to year end 2007, American economic growth was greater than the entire economy of China.

But the remaining fiscal problem is still entitlement spending. For 2013, Medicaid spending is still up 5.9%, Medicare up 5.6%, Social Security up 5.3%. Obamacare is still another entitlement log added to the bonfire. If these entitlement programs are not reformed, they will ultimately eat up 100% of GDP, whatever is left of it. Just like serfs in the Middle Ages, the American people will leave everything to the Lords of the Manor in Washington, and they will get back Social Security, Medicare, welfare, and Obamacare. That is where the long-term budget projections lead.

A special congressional committee headed by Senate Democrat Budget Committee Chairwoman Patty Murray (D-WA) and House Budget Committee Chairman Paul Ryan (R-WI) is meeting now to consider "reforms" to these entitlements. CBO just released today a conventional list of supposed reforms acceptable to the Washington Establishment. It is all: cut this benefit a little here, delay that eligibility there, raise this tax over there. In return for anything on that Chinese menu, Republicans are expected to ease up on the budget caps and the sequester, which currently shut down any new spending for the rest of Obama's Presidency, and agree to yet another trillion dollar tax increase. It is those tax increases that are preventing any real recovery, and destroying the standard of living of the American middle class that Obama likes to talk so much about.

Everything on that CBO Chinese menu is trash. That game is not worth the candle. The spending reductions will not be seriously noticeable, and are not worth another tax increase, or release of the spending caps and sequester that are now tying Obama and the Democrats down.

Real entitlement reform involves fundamental structural reforms that change the way the programs operate. Those structural reforms can introduce positive, pro-growth incentives that lead people to productive activities that promote financial independence, rather than counterproductive activities that promote only government dependency. Instead of those counterproductive activities subtracting from the economy, productive activities resulting from the reforms would contribute to increased economic growth and prosperity for all.

Instead of negative benefit cuts that take away from the poor and seniors, those reforms would result in higher incomes and benefits for the poor and seniors. Yet, such reforms would ultimately reduce government spending by far more than could ever be achieved by trying to slash benefits for the poor and seniors. Indeed, ultimately over the long run, these reforms would reduce federal spending by half from what it would be otherwise. And these are all tried and true reforms that have already been proven to work to produce these results in the real world.

Instead of Social Security encouraging people not to save for retirement, retirement can be based on savings and investment through personal accounts for Social Security and Medicare. Because a lifetime of savings and investment will always result in higher income and benefits than a lifetime of no savings and investment, these personal savings and investment accounts would pay higher benefits for retirees than Social Security even promises but cannot pay. Moreover, with personal accounts, each retiree would be free to choose his or her own retirement age, rather than politics and the government imposing one uniform retirement age on everyone, with market incentives to delay retirement as long as possible, to increase benefits.

But because benefit spending under these reforms are moved off the federal budget altogether, and into the private sector, the result would be the greatest reduction in government spending in world history. The ultimate, long-term goal should be to empower all workers with the choice of substituting personal savings, investment and insurance accounts for the entire payroll tax, displacing the tax entirely with a personal family wealth engine.

The personal accounts would also produce mighty rivers of new capital investment that would cascade throughout the economy, financing breakthrough innovation and cutting edge technologies that would further promote economic growth and prosperity, and leapfrog the American standard of living generations ahead.

The Social Security disability insurance program is now projected by the Social Security actuaries to run out of money to pay promised benefits by 2016, roughly two years from now. That is because with the failure of Obamanomics to produce real economic recovery, millions of the record long-term unemployed are convincing government bureaucrats that they are really disabled and can no longer work. If workers were free to choose to use their taxes for private disability insurance in competitive markets, far better disability benefits would be reserved for those who are actually disabled.

The last successful entitlement reform in America was in 1996, when just one welfare program, the old Aid to Families with Dependent Children program (AFDC), was sent back to the states through a Reagan concept known as block grants. Formerly, the federal financing for AFDC was based on a matching formula that paid states more the more they spent on the program. Effectively, the federal government was paying states to spend more on welfare, which they did.

The reforms replaced that formula with fixed, finite block grants for the program for each state. If the costs of the program rose under the reforms states were now free to adopt, the state would have to pay all of the increase itself. If it cost less, the state would keep the savings.

Under these transformed incentives, within a few years the states led two-thirds of those formerly dependent on the program to go out to work. Their incomes have been documented to increase by 25% on average as a result. Yet, at the same time, the cost of the program to federal and state taxpayers declined by 50% from where it would be otherwise.

Because the poor would benefit as well under the reform, it was enacted in 1996 with over a hundred congressional Democrats joining Republican majorities, and signed by a Democratic president. That is the formula for further bipartisan entitlement reform. (Of course, the Obama Marxist Democrats blindly oppose such reform).

Close to 200 more federal, means-tested welfare programs could be sent back to the states through such block grants as well, including Medicaid and food stamps. The best estimate of the cost of all these programs is a trillion dollars a year. CBO has already scored Medicaid block grants alone as saving $1 trillion to $2 trillion a year, with bills already drafted and introduced in Congress. Moreover, the states could assure the poor better access to actual health care under such reform, through health savings accounts and/or managed care. Again, taxpayers and the poor benefit.

Today, through these welfare programs, taxpayers pay the bottom 20% of the income distribution a trillion dollars a year not to work. Under these reforms, private employers can pay the bottom 20% to work, and climb higher up the income ladder. With that massive expansion of the work force joined with the massive expansion of capital investment cascading through personal accounts, the result is economic kaboom.

Similarly, Obamacare can and should be replaced with Patient Power and Health Savings Accounts that maximize power and control of the sick over their own health care. The market incentives of those HSAs have already been proven to powerfully reduce health costs in the real world. By expanding the same tax relief that now applies only to employer provided health care equally to everyone, health care for all can be assured, unlike with Obamacare, with no individual mandate and no employer mandate, a tax cut of a trillion dollars, and at least $2 trillion in reduced government spending.

Everyone would then choose their own health plan, including Health Savings Accounts if they prefer. The government would not be telling the Catholic Church it has to buy insurance that pays for abortion and contraceptives. If you like your health plan, of course you can keep it. It is all your choice. If you like your doctor, of course you can keep your doctor. It is again your choice. Joining the interstate sale of health insurance with medical liability reform and HSAs would result in the most powerful reduction in health costs ever. That would further promote economic growth and prosperity for all.

This is a true Tea Party agenda that should be the Republican agenda, and the true American Kennedy Democrat agenda. The Marxists can move to Cuba.