January 22, 2009

Don’t Forget About Entitlements

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Short-term profits, irrespective of potential long-term catastrophes, have pushed the U.S. economy into recession and the financial markets in to a standstill. In response, the Obama administration along with the 111th U.S. Congress is designing a stimulus package in the amount of $800 billion. While the nearsightedness of the financial industry has caused this mess, the Obama administration must not be so quick as to forget this lesson. Spending on healthcare as a whole is currently 16.2 percent of GDP, while Medicare alone is approximately 3.2 percent of GDP. As the economy slows, however, expenditures on healthcare seem to consume an ever-increasing percentage. Medicare, along with the other entitlement programs, need serious reform if the current economic stimulus package and other economic reforms are to have any lasting effects.

Something undoubtedly needs to be done in order to salvage the economy and employment. The common public policy response is to increase government spending when consumer spending and investment has declined. While the much discussed stimulus package may prove successful, with its combination of government expenditures and tax cuts, there is another crisis looming in the not so distant future that all should be wary of. It has been projected Medicare will become insolvent in the year 2019. This comes as the baby boom generation retires and unemployment increases. With the economy currently in a downturn, insolvency of entitlement programs may be expedited, especially as the stimulus package saddles more debt onto the backs of taxpayers and the U.S. government.

Throughout the early 2000s, then Chairman of the Federal Reserve Alan Greenspan lowered the fed funds target rate to a level of 1 percent in the wake of the dot.com fallout and the September 11th attacks. Regardless of what offsetting behaviors may have resulted from these low rates, he believed he could compensate in various ways, including raising the fed funds rate. Just as Greenspan discovered that it was not so easy to reverse previous policy, and for that matter to create policy with long-term implications in mind, current economic policy must be designed not only for the present but for the future. Our generation will be dealt the task of funding Medicare for current retirees and it is our generation that runs the risk of not receiving any benefits from Medicare or Social Security.

There must be a fundamental change in the way our entitlement programs are organized, especially Medicare. There may be a high probability that a slight change in the way reimbursements or some other seemingly minuscule measure are calculated can stave off the impending crisis. However, the small probability that, in the absence of aggressive and sweeping action, there are not enough funds to go around for Medicare and Medicaid will wreak havoc. As history has illustrated time and again, short-term remedies have a way of rearing their ugly heads in the intermediate- and long-term.