Paul Ryan’s Budget Proposal—Posner

Paul D. Ryan, the Republican Congressman who is the chairman of the House of Representatives’ Budget Committee, has proposed an ambitious plan for capping federal expenditures and eventually eliminating, or at least greatly reducing, the national debt. The plan is detailed, and I will omit most of the details. The significance of the plan lies not in its details, or indeed in any of its proposals, but rather in the willingness of a major politician to challenge entitlements spending. This is only part of the plan but it has great symbolic significance, displays political courage, may open a productive dialogue, and challenges President Obama to propose his own plan for limiting such spending, which he has thus far been too timid (or politically realistic!) to do. 

Ryan’s main proposals are as follows: 

1. Repeal Obama’s health-care legislation, but reform health insurance by abolishing favorable tax treatment of employer-provided health insurance and giving everyone a tax credit to assist or enable the purchase of a private health insurance policy. 

2. Replace Medicaid with a subsidy for purchasing private health insurance. Also make it a block-grant program rather than a matching program: that is, each state would get a sum of money allocable to Medicaid beneficiaries, rather than, as at present, the federal government’s matching state expenditures for Medicaid, which reduces the cost to the states of expanding their Medicaid enrollments. 

3. Replace Medicare with a subsidy for purchase of private health insurance. But this provision of the plan would not take effect until 2021; so only persons not yet 55 years old would be affected by it. 

4. Make the Bush tax custs permanent, simplify the income tax, limit the maximum income tax rate for both individuals and corporations to 25 percent, and make up the loss in tax revenues by closing unspecified tax loopholes and imposing a form of VAT (value-added tax)—in effect a sales tax—on businesses. 

5. Freeze discretionary federal spending at 2008 levels for five years. Require the vote of a two-thirds majority in Congress to increase tax rates or impose new taxes, and enact automatic caps on increases in entitlement spending. Health-care entitlements spending would be indexed to the average of the consumer price index and annual increases in the cost of health care. Total federal spending could not exceed 20 percent of GDP, compared to today’s 25 percent, which President Obama hopes to reduce eventually (by unspecified means) to 22 or 23 percent. 

The goal of Ryan’s plan is to reduce federal deficits by $4.4 trillion over the next ten years, and to do so entirely by reducing federal spending (by a total of $6.2 trillion). 

Although there are good ideas in Ryan’s plan, what it really shows is that, barring a miracle, the fiscal condition of the federal government will continue to deteriorate. Even if the plan were enacted in full—a political impossibility—it probably would make only a small contribution to reducing future deficits. 

The annual federal deficit, and therefore the national debt, grows when federal revenues fall short of federal expenditures. Revenues can be increased by higher taxes or by more rapid economic growth, so that the same tax rate produces rapidly increasing revenue; reducing the tax rate can, in some circumstances, actually increase total tax revenues, either by stimulating economic growth or by inducing more reporting of taxable income or the shifting of other income sources to taxable income. For example, reducing the corporate income tax rate would induce American multinational corporations to repatriate more of their foreign profits. 

Alternatively, federal spending can be reduced either directly, or indirectly by reducing demand for federal financial assistance—the hope of health-care reformers. 

In theory the most promising route to narrowing the gap between revenue and expenditure is economic growth, because the economy is much larger than the government. A 5 percent increase in GDP would amount to more than $700 billion; half of $700 billion would equal almost 10 percent of annual federal expenditures (currently about $3.5 trillion a year). Compounding could make aggregate economic growth over a period of years greatly exceed increases in federal expenditures. 

But the Ryan plan would be unlikely to have substantial effects on the rate of economic growth. Judging from the effects of the Bush tax cuts, the Clinton tax increases, and the high rate of growth in the post-World War II decades, in which tax rates were much higher than at present, the modest changes in tax rates proposed in Ryan’s plan would not have a significant net effect on economic growth and hence on taxable revenues, bearing in mind that the stimulus effects of tax cuts are offset to a greater or lesser extent by the direct effects of the cuts in reducing tax revenues. Of course, merely correlating past tax rates with past growth rates is crude empiricism, but my impression of the more sophisticated empirical studies of the effect of tax rates on economic growth is that they are inconclusive with respect to the effect of incremental changes from modest levels. 

I am surprised that the Ryan plan does not propose the outright elimination of the corporate income tax, which might have dramatic effects on the repatriation of foreign earnings of American corporations. The repeal of Obama’s health-care legislation would have a positive effect on economic growth by alleviating the concerns of small business, but probably the effect would be small. 

The effect of the plan on economic growth might actually be negative, if, as is entirely possible, the plan if enacted would actually increase the federal deficit. It would be especially likely to do so over the next decade, when Medicare would be unaffected because the reform of it that the plan proposes would not take effect until 2021. Medicare expenditures would grow uncontrollably over that 10-year period. There would be some Medicaid savings, but probably not too many because Medicaid is already starved for resources. With entitlements largely unaffected over the next decade, to keep spending from rising at current rates would require drastic reductions in nondefense discretionary spending (defense spending cannot be reduced much, because of growing instability abroad). Such reductions are not politically feasible. So the deficit would keep rising at least until 2011, and the long-term fiscal health of the nation would thus be riding on the Medicare reform that would take effect in that year. But ten years from now the percentage of the U.S. population that is 65 years old or older, now 13 percent, is expected to reach 16 percent. That will not only increase the costs of Medicare (quite apart from cost increases owing to technological advances in medical treatment); it will also increase the average age of the elderly population, which will further increase the demand for health care, and—critically—increase the political power of the elderly. On the basis of past voting behavior of elderly people, there seems little prospect that altruism toward their children and grandchildren will curtail narrowly self-interested (one might even say selfish) voting by elderly people to preserve their entitlements. 

As I said at the outset, the fact that a major politician is willing to advocate concrete entitlements reform is promising, but the key compromise that Ryan has made with political realities—deferring his proposed Medicare reforms for a decade—renders the plan economically very questionable. 

Perhaps some politician will be bold enough to advocate that all entitlements programs, including social security as well as Medicare, be means-tested, as Medicaid is. There is no reason why people who can afford to provide for their retirement should be subsidized by the government, which is to say by the taxpayer. But such a reform does not appear to be politically feasible.

Comments

[Thomas Rekdal]

A sober and persausive analysis. The truly depressing fact, as Judge Posner points out, is that the Ryan proposal, widely believed to be too extreme to be feasible, does not itself go far enough to actually solve the problem. In other words, there probably is no political solution to our long-run debt problem. The bond market will eventually compel some adjustments long before our vaunted political system does so.

[Rcfwilmette]

Why call Ryan's plan "courageous," when it is not workable and based on unsound assumptions? Really, Posner agrees more with Krugman on the specifics, but is perhaps too kind to call it what it is: dumb.

I don't agree that defense spending cannot be reduced because of "instability abroad," especially when a lot of that is caused by our own foolish adventurism. It is disheartening that the most recent budget deal included gigantic increases in defense spending. Defense spending can and should be drastically reduced. (But that is unlikely given the amount of money influential people make off it.)

[Jim]

I agree with Thomas. We (Americans) will dither until action is forced upon us by impending disaster, and maybe not even then. Ryan's plan does, however, lay the foundation for "I told you so" when the US turns into Portugal or Greece. The underlying problem is the reliance by the public on the government to solve all problems and the governments willingness to comply for votes

[Steve Roberts]

"Courageous?" Again with the word that seems to be so easily assigned to any political polemic. For at least a generation, prudent citizens and politicians have acknowledged that entitlement programs would have to be addressed, if not systemically, then certainly around the margins.
Now we get a plan that is at least 90% political, refuses to even consider a determined revenue increase, and doesn't consider a shared sacrifice by those over 55 years of age (nearly one in five Americans); this is courageous? Courage would have been manifest if Ryan had proposed something that would have angered his base supporters. As a courageous Democrat would have to challenge the premise of certain entitlements, Republicans' courage would be evident from a call to sacrifice by one of their core constituencies or a revenue increase. Of course, Ryan cannot be expected to do something courageous for its own sake, something that really goes against what he actually things is right and correct.
On the other hand, we need to drop this "courageous" claptrap and see the report for what it is, a shot across the bow of the 2012 election cycle. Nothing more nor nothing less.

[ElGreco]

America, this IS the face of decline.

Under the Ryan plan government spending increases along an annual trendline of 2.9%, while under the Obama budget government increases along an annual trendline of 4.8%.

In order for the situation in America to merely stabilize (not be cured, just stabilize) GDP will have to grow at least as fast as government spending. That is simple arithmetic. Otherwise annual compounding in the government’s growth rate inevitably leads to an ever increasing government and thus also inevitably higher tax rates which are bound to affect economic growth sooner or later, leading to an inevitable spiral of decline.

I do not agree with Mr. Posner that redistribution has little effect on growth rate, as I see many people poised to retire early as soon as ObamaCare (the Medicare for all at any age entitlement) kicks in by 2014, as I see many couples refraining from a second income, since most of it goes to taxes in high tax states etc. This change in behavior is so ubiquitous that I find it hard to believe that tax rates do not affect economic growth (all else being equal of course – not a 1950’s special situation where America is the only developed nation left standing and thus was growing at high rates even under high taxation – BTW, the American top tax rates have always kicked in at many multiples of the average income, not just a 2-3 multiple as they do in Europe).

So, therefore, back to the budgets, the Ryan plan barely stabilizes the US economy since stabilization assumes that the US will manage to grow at a 2.9% annual average. Seems possible, since the historical average has been around 3% growth, though some of the strong productivity disincentives recently implemented are likely to undo most of the incentives in the Ryan plan and thus make the historical 3% annual growth expectation very-very iffy. For example, Obamacare alone says “reduce your personal production below 60-80K - by working less, retiring early, be less educated, stay at home parent etc - and taxpayers will pay your healthcare costs”. So a GDP growth of 2.8% that will enable the economy to keep up with increases in government spending, seems iffy even under the Ryan plan.

Obviously the Obama plan, at 4.8% spending growth, mathematically leads to rather quick self-destruction, since there is no way for the US economy to grow at 4.8% annually under the new welfare complacency and productivity punishment policies of ObamaCare, Carbon Taxes, perverse expensive Green Energy subsidies and other dis-incentivising and innovation stifling redistributionist and central planning policies. After all, America was growing at just 3% before even all that got implemented, a healthy but not stellar growth.

So the Obama plan will mathematically lead to significant tax increases soon, which will then trigger a new round of slower growth, then a higher deficit, then even higher taxes, then again even higher deficit,… until the whole thing unravels in 3-4 iterations (i.e. 3-4 election cycles) - and that timeframe assumes that creditors will maintain their absolute confidence that American taxpayers will certainly pay back full principal and interest before their government bonds mature, and thus acquiesce to being satisfied with the low interest rate the US pays on its bonds. But chances are that the confidence of creditors will start declining sooner rather than later (see also comment by Thomas Rekdal | 04/10/2011 at 04:44 PM) so the whole thing seems to me more likely to unravel within 2-3 election cycles under the Obama plan, and that is regardless of who wins the next election, since America seems to have passed the tipping point.

On the way down the road to decline, the rich will get punitive tax rates and the poor will get indirect and direct excise taxes and VAT, because there just isn’t enough wealth and oomph within the rich to keep feeding this level of government spending, so the middle class and poor will have to be tapped to feed the collective machine sooner or later, just like they have in all of Europe.

So the summary is: Ryan plan = US Barely survives. Obama plan = US declines quickly.

However what will actually happen may be even more pernicious…

There will be a COMPROMISE between the Obama and Ryan plans…

…so that government spending growth is somewhere in between, say around 3.8%, under the resulting backdrop of long term European-style annual growth -- in the 2% range (and a global backdrop of 4.5% worldwide average growth) i.e. a definitively declining but not precipitously ruinous path. The decline will be long enough (~20 years) for enough people to forget how America was and how it is, and give people enough time to adjust to the new European-like, low motivation, comfort in mediocrity reality. Again, on the way down, the rich will get punitive tax rates and the poor will get indirect and direct excise taxes and VAT.

Perhaps the only ironic hope is that this COMPROMISE scenario will also prove unstable, since major destabilizing events are likely to take place along the way – both internal and external, like the unraveling of Europe. Europe is now being fast marginalized on the world stage (the French bombs in Libya are the desperate attempts of a declining continent to re-assert itself, albeit against long term economic fundamentals and thus only temporarily) and to the extent that European decline may not follow a quiet path, its disintegration may also perturb America’s decline into a more turbulent trajectory.

But the scenarios and details of the decline, are largely secondary. The overriding event is that the tipping point for America passed some time ago. The very fact that the American people, in November 2008, thought that the fix to the bubble and economic distortions created by central planning was, er, …even more central planning, is perhaps the best testament that America crossed the tipping point some time ago. Only a miracle will save America from decline, and a Tea Party garnering 20% support is not such miracle. Americans, brace yourselves for the ride down, as you copy the rest of the world, because this is the 21st century and events will be moving faster then ever before.

[Jack]

1. Repeal Obama’s health-care legislation, but reform health insurance by abolishing favorable tax treatment of employer-provided health insurance and giving everyone a tax credit to assist or enable the purchase of a private health insurance policy.

JJ --- How would this help anything? Does anyone see any cost compression effects here? Other than making the credit so miserly as to deny H/C insurance programs that cover preventative care??

2. Replace Medicaid with a subsidy for purchasing private health insurance. Also make it a block-grant program rather than a matching program: that is, each state would get a sum of money allocable to Medicaid beneficiaries, rather than, as at present, the federal government’s matching state expenditures for Medicaid, which reduces the cost to the states of expanding their Medicaid enrollments.

JJ --- How would THIS help anything?

3. Replace Medicare with a subsidy for purchase of private health insurance. But this provision of the plan would not take effect until 2021; so only persons not yet 55 years old would be affected by it.

JJ -- So in addition to spending one's "golden years" haggling with insurance parasites, by the time the 55'ers get there they'll wake up to find and unaffordable gap between the voucherette and real world costs that are not constrained by any of these schemes?

4. Make the Bush tax custs permanent, simplify the income tax, limit the maximum income tax rate for both individuals and corporations to 25 percent, and make up the loss in tax revenues by closing unspecified tax loopholes and imposing a form of VAT (value-added tax)—in effect a sales tax—on businesses.

JJ --- Umm Great? So more cut the tax rates, make it up by (haha) closing loopholes? And reducing the top rate from 36% to 25%??? only to slap a more regressive VAT on the working folk?

5. Freeze discretionary federal spending at 2008 levels for five years. Require the vote of a two-thirds majority in Congress to increase tax rates or impose new taxes, and enact automatic caps on increases in entitlement spending. Health-care entitlements spending would be indexed to the average of the consumer price index and annual increases in the cost of health care. Total federal spending could not exceed 20 percent of GDP, compared to today’s 25 percent, which President Obama hopes to reduce eventually (by unspecified means) to 22 or 23 percent.

JJ -- Hmm, it does seem as if Ryan has figured out that given the warmongering costs, the revenue gift to the top 2%, the ongoing payments on the D E B T mostly run up by similar Repub schemes over 20 years of "supply sider" voodoo, that he KNOWS that for a time that we MUST increase tax revenues from somewhere, so wants to deal himself an edge in protecting his sponsors from any increases. Hey! for a while Mr Ryan it IS going to TAKE 25%.

The goal of Ryan’s plan is to reduce federal deficits by $4.4 trillion over the next ten years, and to do so entirely by reducing federal spending (by a total of $6.2 trillion).

JJ -- Haha! and W/O touching the sacred cow of military spending! Good luck!

Posner closes with:

"Perhaps some politician will be bold enough to advocate that all entitlements programs, including social security as well as Medicare, be means-tested, as Medicaid is. There is no reason why people who can afford to provide for their retirement should be subsidized by the government, which is to say by the taxpayer. But such a reform does not appear to be politically feasible."

JJ-- How long will those of most economic and perhaps political power put up with paying for programs from which they are likely not to benefit?

Easier: SS is not a big problem and can easily be balanced by taking a thin slice out of incomes above $107,000. If need be, as with younger SS recipients benefits could be taxed away at some level of income. Medicare, same thing, pay a bit more in taxes to keep it sound for all. Cost compression of some sort HAS to be a part of any and all H/C delivery systems. If the other guys can do it at 12% of GDP we should be able to come close to them. Other nations are deriving better overall outcomes that does the US at 17% of GDP. Hard to chest thump "We're the best" with this mess.

"But such a reform does not appear to be politically feasible."

JJ-- Nor should the continuation of the ALL FOR THE RICH, Devil take the hindmost, politics of today. We still have the highest GDP, the highest average income (other than a few oil kingdoms) and are not poor, we CAN and should take care of our public bills. If we are to gin up wars and be the "protector" of the world, we'd better get used to paying for it, or, at least form coalitions with others who'll ante up.

[Pet Care Rx Reviews]

I agree with Thomas. We (Americans) will dither until action is forced upon us by impending disaster, and maybe not even then. Ryan's plan does, however, lay the foundation for "I told you so" when the US turns into Portugal or Greece.

[sell silver coins]

Sometimes, even small fluctuations can lead to huge price difference if the volume is large.

[Xavier L. Simon aka Xavier]

All of the proposals make clear that the country is on a path to self-destruction. At 04/10/2011 at 04:44 PM and 04/11/2011 at 01:26 AM Thomas Rekdal and ElGreco, respectively, paint it about right. The bond markets will shake the country into reality, and it won’t be pretty. Even the proposal, if you can call it that, by Becker, Shultz and Taylor falls short; it is all based on wishful assumptions. Why oh why do learned people like them fool themselves and us into such stupor? And that is only on the numbers which are the easiest to validate, or not. Only Judge Posner seems to get it.

For some years I have tried to understand the long term trends and particularly the swings or ciclicity in civilizations’ social and economic development. All civilizations and societies in history have managed to collapse, sometimes with devastating effects. The best narrative and analysis is in Ian Morris’ “Why the West Rules—For Now.” The best he can do, however, is to point to a paradox of development and what he calls the five horsemen of the apocalypse: climate change, famine, state failure, migration, and disease. To deepen his analysis further Morris also resorts to biology, sociology and geography.

His case is very compelling. Using all of these elements Morris analyses how, and, speculatively, why, the Romans hit a development ceiling in the 1st century and the Song Dynasty in China in the 11th century. He goes on to speculate whether the West may be approaching another ceiling. It is interesting how other notable historians, like Neill Ferguson and some years back David Hackett Fischer, have also concluded that the West is peaking. I agree but believe that they all miss a very important variable alluded to by ElGreco.

To the biology, sociology and geography analytic dimensions I would add psychology. Social scientists concerned with development fail to understand that while man’s organizational capabilities have increased his psychological development apparently has not. Indeed, Morris himself keeps referring to how man is “greedy, lazy, and fearful.” I agree but have been greatly surprised that he doesn’t explore the implications. I have spent many years developing a model of social change that takes into account these human traits head on.

The key is in how the greedy, lazy and fearful traits combine to produce a free riding human that looks for an external entity to protect him, and, if he can get away with it, to provide for his needs. In “Hierarchy in the Forest: The Evolution of Egalitarian Behavior” anthropologist Christopher Boehm tells us how from the days that men were hunter-gatherers, and even as apes before that, their social interactions have been regulated by a balancing between a quest for power and the free riding instinct. Apparently nothing has changed. Boehm points out that “with respect to intentions, at least, the communist enterprises that…absorbed [the 20th century] are considered as experiments that were based on a tragically faulty assessment of human nature.” (p ix) I can only add that the economic models of Obama, Ryan, Becker, and others are based on the same tragic faulty assessments.

Europe, particularly Britain, and then the US as Europe began to slow down for the very same reasons that the US is now slowing down (below), were able to thrive during the three to four centuries during which their social structures and belief systems helped them coalesce sufficiently while simultaneously providing very strong restraints on free riding. Take the US. For three centuries it was a highly decentralized society with decision making mainly at the local level, and a system of values that gave it unusual vitality. With its very strong emphasis on limited government and checks-and-balances the Constitution privileged this structure and traits.

The large migrations of the 19th century, both from Europe and from rural areas to the cities, as the country went into industrial hyper-drive brought tremendous pressures on those structures and values. Traditional family, community and religious support systems began to break down as people gathered in large cities. Man needs support mechanisms to overcome his fears. In the big cities these were no longer as readily available as in the traditional smaller communities. At the same time the job, which became the more immediate source of support, was seen to be exploitative. Little by little man turned to government for support. Thus the Progressive Movement of the early 20th century and the success with which the Executive began to bypass elected representatives to take its case directly to the people.

That dependence on a centralized government grew steadily as the century progressed. At the same time man in the big cities also began to shed his reliance on the old values based on religion and began rediscovering his natural rights, but because this time he was more alone he began to rely on government to protect and eventually to even grant more of them. The Constitution began to be turned on its head. As these values changed large segments of the American population began to lose the vitality, independence, and quest for success through hard work that had made the country great in the first place. Will we now be able to return to the old values and structures? I seriously doubt it, unless we can restore the old values and vitality including to the cities.

The dispossessed—and I am defining those to include all who have weak social support mechanisms—look to government to solve their problems, and even among relatively wealthier seniors to provide what is due them if for no other reason than, I suppose, to be able to feel that somebody cares. Remarkably, just last week on trying to help solve a problem to do with the quality medical services I was told by a highly educated but socially unsupported senior not to worry, that “the Democrats will fix it.” At the same time that person’s much more well to do colleagues were busy trying to extract monetary gain from the insurance plan even as their medical benefits eroded. That leaves the young dreamers but they are too busy making their lives.

[Natalie Pace]

Dear Dr. Posner,

Will the ECB decision to raise interest rates put pressure on the U.S. to do the same?

I hope you'll address this in an upcoming blog.

[cycling clothing]

Health-care entitlements spending would be indexed to the average of the consumer price index and annual increases in the cost of health care

[Bob the Health and Health Care Advocate]

El Greco, you wrote: "I see many people poised to retire early as soon as ObamaCare (the Medicare for all at any age entitlement) kicks in by 2014, as I see many couples refraining from a second income, since most of it goes to taxes in high tax states etc."

Obamacare is NOT Medicare for All. Obamacare IS NOT national health care. See this comparison of health-care-NOT-for-all (Obamacare) to health-care-for-all (Improved Medicare for All:
http://mforall.org/p/934

Improved Medicare for All is much better than Medicare for 65 and older:
http://mforall.org/p/852

See a 2010 review of the data ...
http://mforall.org/p/997 ...
from 250 years of experience of more people than the United States.

If we were headed to Improved Medicare for All, we'd be headed to spending LESS THAN HALF what we do today, while covering everyone for our entire lives, helping not only the America's budget but also Americans' budget. And we'd cover everyone our entire lives.

How would it work? We'd show our card, and we'd get care. Read here from experienced Americans who live and work in other countries about living with no major medical bills.
http://mforall.org/p/966

If you have questions or concerns, go here:
http://mforall.org/p/830

Regards, Bob the Health and Health Care Advocate mforall.org/p/200

[an observer]

I am left to wonder why Posner doesn't take the final step and just admit that conservatives are wrong on all scores

He goes most of the way with this comment:

the Ryan plan would be unlikely to have substantial effects on the rate of economic growth. Judging from the effects of the Bush tax cuts, the Clinton tax increases, and the high rate of growth in the post-World War II decades, in which tax rates were much higher than at present, the modest changes in tax rates proposed in Ryan’s plan would not have a significant net effect on economic growth

What is amazing is that we know what causes economic growth: (a) a high level of gov't funded basic research; (b) venture financing; and (c) elimination of state laws, like non-compete contracts that keep employees from moving and sharing ideas.

And, he could have been honest that Ryan's plan is not plan. No competitive insurance market for seniors is going to suddenly appear in 2022, for the only way that insurer can write policies for seniors is for it to be mandatory that everyone buy insurance.

[ElGreco]

You are correct. Strictly speaking, ObamaCare is not “Medicare for all at any age”. However, in the short span of a blog post, one must often concentrate on the primary, first order core effects.

To be a little more exact, ObamaCare is: “About 80% Medicare coverage for all who make less than 60-80k per year (depending on family status), or become attracted to qualifying for the subsidy by reducing their income/production in the future.

So, in a nutshell the core ObamaCare economic incentive is:

“The more you choose to withdraw from work/production, the larger the share of your healthcare someone else will be forced to pay”.

In that respect, ObamaCare is even more progressive than many European healthcare systems, where almost everyone pays and everyone draws benefits (i.e. an imposed near monopoly).

However, the presumably European environments are not environments with “free” healthcare. They are essentially environments with mandatory pre-paid medical care. Many of the costs are indirect and hidden, because the individual never even sees how his/her daily work is being harvested to pay for these communal services (ever wondered why salaries are so much lower in Europe? Ever wondered why the average European’s purchasing power is so much lower than the average American’s?) Many of these European environments, when it comes strictly to healthcare, are not simply socialist, they are actually full blown communist. You contribute according to ability (and desire to work) and you take out according to need. Because under such systems consumers are completely insulated both directly and indirectly from medical costs, centralized rationing, both throughout as well as at the end of life, becomes the only way to contain uncontrolled explosion of medical services and costs.

But those systems are not free, by far. They cost both in terms of their direct costs to the common purse, but also, primarily, in the mid-long term, via decreased incentives to excellence and thus slower economic growth. With economic growth failing to compound as fast as the world average year after year, the country enters a relentless relative decline (the essence of Europe’s economic marginalization).

“Give me because I want it and/or I need it. Give me healthcare because I want to use the money I will save to buy a bigger car, bigger house, eat out etc.” may be viewed as a societal obligation, if you are of a certain political persuasion, but it is not a recipe for prosperity. In economic terms, it is a mandate that sucks the vitality out of people’s desire to produce and leads to group economic decline.

The overriding general principle is that:
Once some core things in life, like healthcare, education, and some retirement, become guaranteed (albeit ultimately and inevitably at some mediocre level) regardless of what and how much one contributes to society (i.e. regardless of how capable, ambitious and willing to do exceptional work one is) then few people remain motivated enough to pursue excellence. With a large majority of the population complacent in mediocrity and weighing down on the few that still (foolishly) seek exceptionalism, economic vitality and growth wither, and then, inevitably the very sacred core state services must also inevitably degrade in quality. In those environments, individual competence cannot overcome low motivation, so overall prosperity declines. This is why the much more educated Europeans barely manage to produce a little less than the “dumb” Average American. But Average Americans under French incentives to produce will equal Argentina, not Germany (or France for that matter – ok with some more education Americans may eventually climb back up to the level of Greece).

The American liberal’s hope that somehow an American population downgraded to having the same incentives to excel as the rest of the world can somehow magically sustain a standard of living that is five times the world average is an asinine illusion. I can say that with confidence because, having passed the point of no return on the road to collectivism, this is where Americans are headed. There is no turning back. The collective will continue its relentless expansion of mandates, placing an ever larger proportion of economic activity under homogenized collective management and redistribution. People’s motivation and avenues to exceptionalism will be choked off and America will continue to loose ground at an ever accelerated pace compared to the rest of the world. Europe is leading the way, but alas, by the time Europe goes down into the rapids, it will be too late for Americans to stop – too far down the canyon to climb out. I have seen this movie played many times and I am now seeing it once more being played here in my adopted country: the USA in decline. Again, I can say that with confidence because, having passed the point of no return on the road to collectivism, this is where Americans are headed. So you will soon - within a couple of decades at most - have proof all around you. As the world tide rises at 4.5% annual growth while the US reverts to becoming anchored at European levels of 2% annual growth, the overall feeling will be one of…well…sinking. Then thanks to the permanency of the internet you can all read back all these comments… and Paul Krugman can blame America’s decline to the fact that ahem!.. it just did not turn left enough…(what a joke!)

[Best iPod docking station]

The situation that the U.S. government has deteriorated into is truly sad. We are running trillion dollar deficits every year. Year after year. Undoubtedly this is unsustainable. Sooner or later it's gonna all come crashing down. The U.S. will just be another Greece and Portugal. I truly believe that Ryan's plan is our only hope of getting out of this mess.

[Jack]

ElGreco: Brilliant! that's exactly what happened to me! Man! there I was putting the finishing touches on my best seller "Wot Hoppen to 'merica or How'd we get so por?" but when I found out I might have to pay some small percentage of my royalties and a portion of my expected Nobel prize income -- I went right away, hid it deep in my closet with the giddy anticipation of someone else being forced to pay for my healthcare. I quit taking my cod liver oil TOO! By golly I'm going to MAKE 'em pay!

"“The more you choose to withdraw from work/production, the larger the share of your healthcare someone else will be forced to pay”."

[Jack]

Xavier?? What is THIS?

"Europe, particularly Britain, and then the US as Europe began to slow down for the very same reasons that the US is now slowing down (below), were able to thrive during the three to four centuries during which their social structures and belief systems helped them coalesce sufficiently while simultaneously providing very strong restraints on free riding. Take the US. For three centuries it was a highly decentralized society with decision making mainly at the local level, and a system of values that gave it unusual vitality. With its very strong emphasis on limited government and checks-and-balances the Constitution privileged this structure and traits."

.......... Like the "belief" system of slavery? The great triangle trade of slaves for rum and rum for sugar to make more rum?

......... or later the "values" that gave us the same concentration of wealth in the hands of the very few, followed by a decade long Depression broken only by a world war?

........ and the "decentralized" "decisions" of segregation and the exploitation of labor that led to the unions and Federal worker and safety rules?

Do you see anything in these GDP graphs to support your contentions? The curves seem to average 4% or so for quite a long time. Or would we have to go back further than the post WWII era? Perhaps to get into the high growth on a small base era similar to that of China and its exploitation of labor and lack of protective laws that are "so productive?" Please explain.

[Jack]

US GDP history:

http://webcache.googleusercontent.com/search?q=cache:rYRz9D1IbmUJ:www.data360.org/graph_group.aspx%3FGraph_Group_Id%3D149+us+gdp+growth+history&cd=3&hl=en&ct=clnk&gl=us&source=www.google.com

[Cross Country Home Services]

The presumably European environments are not environments with “free” healthcare. They are essentially environments with mandatory pre-paid medical care. Many of the costs are indirect and hidden, because the individual never even sees how his/her daily work is being harvested to pay for these communal services.

[Xavier L. Simon aka Xavier]

ElGreco, thanks for your excellent 04/12/2011 at 12:17 AM synthesis of what happened in Europe and is now settling into the US. I hope you don’t mind my quoting you every now and then.

[PrometheeFeu]

"There is no reason why people who can afford to provide for their retirement should be subsidized by the government, which is to say by the taxpayer. But such a reform does not appear to be politically feasible."

Perhaps because they pay into it. I would imagine that those of us who are required by law to pay into Medicare or Social Security despite having a preference for providing for their own retirement would not take kindly to in addition get nothing in return.

[Romeo King]

Bravo to this blog for saying what has to be said over and over again," On the basis of past voting behavior of elderly people, there seems little prospect that altruism toward their children and grandchildren will curtail narrowly self-interested (one might even say selfish) voting by elderly people to preserve their entitlements."

The media and the blogosphere have to do what politicians refuse to do, publicly shame greedy older Americans who resist means testing for Medicare and Social Security.

[an observer]

Jack

The GDP chart tells the whole story. Note that since we dropped taxes on rich, starting with RR in the mid-80s, that GDP has declined.

There is on reason. The primary driver of growth is government investment in basic research

[Jack]

Observer: Thanks, and interesting observe! And our very own "Chicago School" proffs are fond of the concept of government borrowing "starving out" private investment due to high borrowing costs. Lately, in light of a deflationary backdrop that doesn't seem the case but it sure was when Reagan and HW were quadrupling the debt.

Romeo .. Ha! perhaps the "greedy older folk" simply have the perspective that the younger folk will, with luck, eventually become older folk.

You may be young enough not to know what a burden it was in the past for a 40 year old to deal with college costs AND perhaps helping Mom with H/C issues before Medicare. "Means testing as PrometheeFeu's comments illustrate is just the latest (of many) Repub efforts to kill the Medicare they opposed in its infancy.

Cheers! and do remember than ha! our "competitor nations" do a fairly good job of providing H/C for ALL of their citizens and at 12% of their typically smaller GDP as compared to 17% of our larger GDP.

[foreign exchange attorney]

Whether the Forex manager is a "Forex CTA" and only provides advice to individual accounts, or if the manager is a "Forex cpo" and provides advice to a fund, the manager will need to have some sort of disclosure document to provide to the investor. This document will need to be prepared in accordance with the NFA regulations and will also need to be approved by the NFA prior to giving them to potential investors. The disclosure documents will generally need to be prepared by the Forex attorney.