Haven Pell, December 28, 2012 at 3:09 pm said:

Note: The following was submitted by loyal reader Stan Hatch separately from the article above. Nonetheless, they are on the same subject so I hope this captures your attention.

Hi Haven,

I’m a loyal reader of your newsletter so thought I’d offer some comments. This is a subject of interest. A fact or two may be a little off, but I think it’s pretty close to the mark. You are welcome to use it all or in part and edit it for clarity. Stan Hatch SPS ’63
After the election Republican House Speaker Boehner proposed increasing taxes on the rich by limiting deductions but keeping rates the same. That was Romney’s proposal. Obama rejected it out of hand and said rates for the rich had to go up, as he had campaigned. For 1.8 trillion in revenue that Obama wanted to tax the rich, he conceded 800 billion in spending cuts, with no cuts to entitlement program benefits (social security, Medicare and medicaid). Boehner asked for 4 dollars in cuts for each new dollar in revenue, which I think should be more like 6 dollars, but anyway with 4 dollars its about 7 trillion. Obama rejected that out of hand.
They are far apart in the numbers as well as ideologically and an immediate compromise does not look likely. Obama may let the “cliff” come since then the tax rates will go up on the rich and polls tell him most of the public will blame Republicans, “the party of no.” Then Obama will propose tax cuts for the middle class and dare the Republicans to say no. Obama has the cards and he’s playing them. Let’s hope that after the first of the year there will be serious on negotiations and that the what is passed is substantive.
The debt ceiling limit will hit around March, and the Republicans will face public pressure not to say no again. The Republicans know they have a chance to hold out for meaningful change and hopefully Obama will use the opportunity to pass entitlement reform which he must realize is necessary. That opportunity, after the first of the year, will be for the Democrats in the Senate to offer something that Boehner can get enough Republicans in the House to support. It will mean Boehner will have to break away from main stream Republican philosophy of no new taxes (he did that in his offer to Obama, incurring the wrath of many conservatives) and it will mean no support from the tea party members. If there is enough entitlement reform in a Senate proposal, he should be able to do it. If entitlement reform is not significant, it or it simply will not pass the House.
It’s interesting that all the entitlement savings Obama has proposed are to pay the hospitals and doctors less. That means more doctors will stop taking Medicare patients. Most won’t take you now without supplemental insurance, and some doctors won’t take you at all. More and more doctors are going to the “concierge” system. They want a fee just to keep you on their patient role.
This means Obama’s approach to saving entitlement costs of having no cuts in benefits simply won’t work. The spiraling cost of medicine has to be dealt with, but not simply by reducing reimbursement rates. Unfortunately for those who have some income, Medicare will start to be means tested, meaning those who can afford it will have Medicare cover less of their costs and they privately will have to pay more. Social security will also be means tested, which means if you have other income you get less social security.
It seems most of us have paid plenty for that coverage, and that is what it was called, not a redistribution tax. However there is no doubt the current structure is unsustainable. I believe the federal government is borrowing something close to 40 cents for each dollar of spending.
The Obama administration did the right thing with stimulus spending and forcing interest rates down even if there has been much wasted money. One could argue that Democratic policies did much to cause the mess, but once in the mess it doesn’t matter how you got there, except to learn from it and try to avoid doing it again. The stimulus was a short term solutions. We avoided much of the disruption that has occurred in Europe where they have cut benefits due to their fiscal crisis. We’ve financed our way through it.
Now we need to address the problem from a mid term and long term perspective. The entitlement changes needed will have to be phased in so that those receiving the benefits are not hurt all at once and so that those working have ample warning. Yes, it means more taxes for the middle class eventually, whether its more limited deductions or higher rates. It also means a later retirement age and having to save more for your own retirement. Ever heard the phrase “There is no free lunch. Someone ultimately pays for it.” That applies to the current situation.
Our children will be paying the tab and the longer we put off these reforms. Unless there are offsetting productivity gains, it will mean a lower standard of living for many. What we need to offset this is more opportunity and more incentive to make money. That’s hard with increased tax rates. I think reducing deductions and credits is much better as Romney proposed because people still keep more of each dollar they make. Let’s hope our legislators see it that way.
The demographics of our population will make the entitlement problem worse unless we make changes. People are getting married later and having fewer children. Immigration has slowed down and immigrants traditionally have more children. People are living longer. This all means that the percentage of the population that is retired and not working will go up. With a system where those working support those retired, there will be a heavier burden on those working. Fewer will be supporting more. That is because our system currently works with dollars in equals dollars out, with a cushion only for timing. A private pension fund funded this way would be declared insolvent.
However the election shows that this clearly was not top priority for those voting for Obama. Exit polls show that those who voted for Obama had deficit as 6 th in their priorities. Ahead were education, social security, unemployment and other social programs. It was only first priority for those voting Republican. It appears Obama scored big stressing other issues in his campaign.
The Democrats have not changed their priorities after the election. The Newark New Jersey mayor recently made a campaign to show how difficult it is to live on food stamps. His approach is to give out more. Pelosi says cutting entitlements hurts those who are the most vulnerable and has the least effect on the deficit.
The Republican party has to reform itself to being the “party of opportunity” instead of the “party of no.” Instead of giving a handout, let’s try to give jobs. It’s more expensive in the short run, but it costs less in the long run and society gets something in return, the services provided. The democrats argue that the poor spend all their handouts so it is a stimulus to the economy. True, but wouldn’t it be better if their money came from a job instead of a handout. Of course we will keep the subsidies for those who have no means of earning it. We just need to retrain and reemploy those who can work.
Even if the other issues were more important to the voting public in the last election, let’s hope the politicians now do the right thing now. That means making the entitlement reforms. If they don’t, our future does not look good.

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