Don’t believe the numbers, Obamacare is a financial disaster
The health care overhaul, the biggest legislative initiative since LBJ’s Medicare bill, has become the law of the land. The cost, says the Congressional Budget Office (CBO), is ONLY $940 billion over the next 10 years. Better yet, adds the CBO, it will reduce the federal deficit by $138 billion over those same 10 years.
Let me see if I got this right. The Obama administration and its congressional allies would like us to believe that the biggest piece of legislation in 45 years, one that will expand medical coverage to 32 million uninsured Americans, that will set up two new huge entitlement programs – health insurance subsidies and long-term health care benefits – is going to cost just $940 billion while reducing the U.S. government’s fiscal deficit by $138 billion?
Sorry, I don’t buy it.
In a recent Op-Ed piece in the New York Times, Douglas Holtz-Eakin, the director of the CBO from 2003 to 2005, now president of the American Action Forum and obviously someone in the know, doesn’t buy it either. I quote:
…the budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed. So fantasy in, fantasy out.
In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges: The health care reform legislation would raise, not lower, federal deficits, by $562 billion.
Now this makes more sense. According to Holt-Eakin’s calculations, instead of a reduction of $138 billion in the U.S. government’s deficit, we have an increase of $562 billion. And although Holtz-Eakin doesn’t explicitly say it, that means the total cost of this bill over the next 10 years is not $940 billion but a whopping $1.6 trillion. That’s a negative swing of $700 billion.
The full Op-Ed is here and I highly suggest a read.
From where I sit though, the true cost of this bill, and the impact on the U.S. government’s deficit, looks to be higher than even Holtz-Eakin contends for two reasons.
First, the bill front-loads tax revenues and back-loads spending; specifically, the new taxes the bill mandates are set to begin immediately while the new spending it authorizes will not begin in earnest until four years out. In other words, the full cost of this bill and the negative impact it will have on the deficit are being grossly underestimated.
Based on this simple exercise, the 10-year cost of this bill when fully implemented, what financial analysts call its normalized run rate, is a huge $2.7 trillion, yielding a negative blow to the deficit of an equally huge $1.6 trillion. Now, I admit I may be guilty of some double counting with this simple calculation, but by the same token, the bills provisions ramp up over time, meaning this calculation is likely not capturing the full cost of every program.
To put these numbers into perspective, when in full swing, the provisions in this bill will generate $270 billion more in spending per year, or 8% of the government’s fiscal 2009 spend. It will require $160 billion more in borrowing capacity per year, or 11% of government’s 2009 borrowing requirements. And it will be done by a government that currently sports a deficit to GDP ratio of 10.5%.
This on an economy considered doing well when it’s growing at 3% per year.
Second, the $1.6 trillion deficit increase that my arithmetic yields is likely too low, for the new taxes mandated by the bill and assumed as revenue by the CBO are simply not going to be realized, quite possibly at anywhere near the CBO’s estimates.
Indeed. Not only does history teach us that raising taxes is largely self-defeating, inhibiting production, income and employment and therefore the hoped for increase in government revenue, but so too does sound economic logic.
You see, higher taxes discourage the factory worker from taking overtime to earn a few more bucks, a spouse from seeking a job to help with the family budget or a seasoned executive from working a few more years, instead of opting for early retirement. Combined with unemployment insurance, higher taxes may even discourage an unemployed worker from seeking new employment, at least until his unemployment benefits run out.
Higher taxes discourage entrepreneurs from starting new business ventures, expanding existing ones and of course hiring new workers. And when those taxes become particularly onerous, those same entrepreneurs may even close up shop.
And, most importantly, higher taxes discourage people from saving and investing, the very fuel for economic growth. It is these kinds of taxes, more than any other, that deprive the economy of the funds necessary to grow production, income, and employment, especially when those taxes, like the taxes in this bill, target those most able to save and invest – the so-called “rich.”
Now, without all these people doing what they do best, hampered as they will be by this bill’s burdensome taxes, the hoped for new tax revenue coming the government’s way, the same revenue assumed in the CBO’s revenue assumptions, will be sure to disappoint.
What this means is that my $1.6 trillion deficit impact is likely just the beginning of even higher government deficits and larger borrowing requirements to come. Then again, leaving the costs of government spending programs to future generations has been the modus operandi in Washington for years.
I’m not here to debate the government’s role in health care. What I am here to say is that in the end Obamacare will prove a financial disaster for America, no different that LBJ’s Medicare, which I think is what the boys and girls in Washington originally set out to fix.
One final thought. When’s the last time a government program began and ended with its opening salvo. Unless this bill is overturned in the Supreme Court or repealed by a future Congress, this baby may just be getting started.