Bullets vs. Band-aids: Is health spending crowding out defense?

The president's aggressive State of the Union message (as expected) amplified what some had called the most full-throated defense of liberalism since FDR. It's certainly not news that the president heavily prefers entitlement spending over defense spending. But in light of his proposed reductions in defense spending and sharp increase in health spending under Obamacare, I was curious to see just how much he's tipping the scales in favor of health spending relative to his predecessors. To answer this question, I grabbed the most recent available numbers from the Office of Management and Budget.

The answer is sobering. In 1946, the federal government spent less than a penny on health care for every dollar spent on defense.[1] By 1965, the year Medicare and Medicaid were enacted, this had risen to only 3.5 cents on the dollar.

However, once we federalized responsibility for taking care of health expenses of the poor, elderly and disabled-which were largely a state and local government responsibility prior to 1965[2] -the ratio of health spending to defense grew rather quickly to about 41 cents when President Reagan took office. Despite the large increase in military spending under the Reagan administration, this ratio stayed constant through most of the 1980's.

The ratio escalated quite rapidly during the Clinton years, despite a slow-down in the rate of health spending during his administration. This reflected sharp cuts in defense spending (the so-called "peace dividend" which some argued ended up "hollowing out" the military) as well as rapid growth in federal health spending.  The rate of increase in health spending certainly slowed down during the Clinton administration-largely due to the arrival of managed care-but in absolute dollar terms, federal health spending in the last year of the Clinton administration was 75 percent higher than in the last year of President George H.W. Bush, while Medicare spending was two-thirds higher. In contrast, in absolute dollar terms, defense spending actually declined slightly between those two years.

The arrival of President George W. Bush heralded both a reversal of the hollowing out of the military, along with wars in the Middle East, resulting in a temporary decline in the ratio of health to defense spending during most of his term. Even so, the ratio by 2008 was still higher than it had been in 1994.

President Obama not only has reversed this temporary decline. Under Obamacare, this ratio will experience its largest upward increase in the history of this country. What to make of this?

First, unlike the "full employment rate" or "target inflation rate" used in federal policymaking, I'm not arguing that there is some magic ratio of health to defense spending that we need to maintain. The metric is simply an accounting device to more easily see how spending in one area has been changing relative to another. It's much easier to see the relationship in a single line than by mentally comparing budget shares for two different line items, for example.

Second, however, it helps remind us that there are very real trade-offs involved in devoting an ever-increasing share of the federal budget to health care. It's easy to debate hypothetically how much Americans are willing to be taxed. But as an empirical matter, the share of GDP absorbed by federal taxes has been astonishingly stable since 1946-averaging less than 18 percent and exceeding 20 percent in only one year (2000).[3] The president's own budget shows federal receipts going no higher than 19.2 percent of GDP by 2017. But he has put us on a path that his own Department of Treasury has declared is "unsustainable." Why? Because health entitlements under Obamacare will grow so rapidly that federal spending as a share of GDP will grow by more than 40 percent by the year 2085. Rising health entitlements will account for every penny of that increase!

With projected federal spending topping 34 percent of GDP and the known politically acceptable levels of federal tax revenues falling below 20 percent of GDP, we are between the proverbial rock and a hard place. Being able to afford even 4 percent of GDP for national defense-we've averaged 6.4 percent since 1946-will grow increasingly problematic. This is not just some future hypothetical: as it is, we currently are spending $50 billion less on defense in FY2013 than outgoing Secretary of Defense said just two years ago would be needed this year. And remember that Obamacare spending kicks in with a vengeance in 2014.  Thus, the choice between bullets and butter will be harder to make each year we keep kicking the can down the road instead of addressing health entitlements.

The president has pledged repeatedly to make "hard decisions" and have an "adult conversation" over entitlements. But actions speak louder than words. Rather than address this elephant in the room, the White House-in advance of the State of the Union speech- already had preemptively (and unequivcally) removed from discussion a very sensible, solid first step towards getting Medicare spending under control: raising the eligibility age for Medicare. Given both that the White House previously has endorsed the idea and that it could save $100 billion over the next decade alone, this is a very tragic step backwards.

I'm not going to repeat the excellent arguments already made by other scholars such as Joe Antos, Stuart Butler, Jim Capretta, Bob Moffit, and Avik Roy in favor of this change. Suffice it to say that it is a very serious policy proposal. To have it unequivocally taken off the table for discussion suggests a president more interested in pandering to his base than solving a critical public policy issue.

Having ruled out one of the easier and sensible steps needed to redress Medicare's fiscal imbalance, the president ideally would have presented his bold alternative for addressing a problem that everyone in country recognizes must be addressed. No such luck. The president talked a good game about being willing to offer the same amount of Medicare cuts as were proposed by Simpson-Bowles. But he also cautioned against breaking Medicare promises already made.  Which is to say, he left himself enough rhetorical running room to oppose any of a large number of potential reforms to Medicare as somehow violating promises made to current or future Medicare beneficiaries.  Senator Rubio's response was absolutely on the money: "anyone who is in favor of leaving Medicare exactly the way it is right now is in favor of bankrupting it."  And until and unless the president moves beyond mere rhetoric to a concrete set of proposals showing exactly how he would achieve the savings he claims, a skeptic would have to put him in the keep-Medicare-as-it-is-camp.

This may seem harsh, but the president does not have a large degree of credibility when it comes to health care. In his State of the Union addressed, he assured us "Already, the Affordable Care Act is helping to slow the growth of health care costs." Yet his own Medicare actuary and numerous independent actuarial firms have repeatedly demonstrated the opposite. Indeed, as I catalogued a few weeks ago, virtually every major promise the president made about Obamacare has turned out to be false.[4] So why should we believe the president's promises of what amounts to a secret plan to reform Medicare?  Leadership means taking a stand, articulated in sufficient detail that the plan can be honestly scored by the CBO.

The president has had 4 long years to put forth his plan for fixing Medicare. To date, he still has not done so!  Instead he gave us Obamacare, which, if honestly scored-as Medicare public trustee Charles Blahous has deftly demonstrated-makes Medicare's fiscal future much worse, not better.  His skepticism is shared by the CBO and Medicare actuary, which every year have felt compelled to offer an alternative fiscal scenario that reflects current policy knowing that this provides a far more accurate depiction of our long-run fiscal future than the current law baseline.  Thus, as a practical matter, the president continues to be AWOL on an issue that matters more to the life, liberty and happiness of current and future generations than virtually any other.

But then again, expecting leadership on how to avert the looming entitlements tsunami from a president incapable of even submitting a budget on time probably is expecting way too much. If we want leadership on this issue, the State of the Union speech sadly signals that we may need to wait until this can-kicker leaves office.

Update 1

In his comments on Senator Rubio's effective response to the SOTU, Avik Roy has astutely pointed out that Obama effectively wants to use Medicare to subsidize coverage for wealthy seniors such as Warren Buffett: "If we gradually raised the Medicare eligibility age, for example, the net effect would be to prevent taxpayers from subsidizing the health care of wealthy retirees, because the means-tested exchanges would gradually replace the universal Medicare program."

Footnotes

[1] For policy wonks, I'm using OMB's functional categorization of defense spending, recognizing that it excludes some components that arguably are defense-related, such as Veterans Affairs, international affairs, military retirement costs, Homeland Security, and DOD retiree health care, which appears in other parts of the budget. Using the broader definition of health obviously changes the absolute numbers, but does not appreciably alter my conclusions about trends. Readers are free to do their own calculations from the data reported here. A recent analysis by Veronique de Rugy shows that for FY2012, these other components would amount to about 27 percent of defense spending more broadly defined. For my purposes, health spending includes the sum of individually-reported components for Medicare and health.

[2] Strictly speaking, the federal government assisted states to some extent in financing health care for the poor and elderly. But 1966 represented the first year that federal health outlays exceeded those of state and locals governments and the reason for that sharp change in relative spending was the arrival of Medicare (whose subsidies came entirely from the U.S. Treasury) and Medicaid (for which the federal government has always financed more than half of all spending-a balance that will be tilted even more heavily in the federal direction once Medicaid expansion is complete).

[3] Again, I am relying on official OMB figures reported here. From 1946-2013, total federal receipts (including off-budget receipts) averaged 17.7% of GDP.

 

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Christopher J.
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