Here's The Deal

David Leonhardt is one of the most thoughtful and coherent economic writers of our time -- you just might not recognize his name because he doesn't write much anymore.

Here's the Deal -- a short e-book that will set you back $1.99 -- lays the federal budget bare, exposing exactly what's causing our deficits, what poses the biggest risk to future deficits, and how we might address the nation's growing debt. He doesn't yell or spout ideology. He uses numbers.

"Eventually," Leonhardt writes, "the country will have to confront the deficit we have, rather than the deficit we imagine. The one we imagine is a deficit caused by waste, fraud, abuse, foreign aid, oil-industry subsidies and vague out-of-control spending. The one we have is caused by the world's highest health costs (by far), the world's largest military (by far), a Social Security program built when most people died by age 70 -- and, to pay for it all, the lowest tax rates in decades."

[I thought everybody knew that..  Maybe, but they're not really addressing it.  OK, maybe not.]

bombing works

In the fall of 1972, Democrat Sen. George McGovern was running for the presidency against incumbent Republican Richard Nixon. From his campaign rhetoric, it was clear to the Vietnamese Communists they could get more concessions from McGovern at the ongoing Paris peace talks than from Nixon, so they were literally rooting for him. But when Nixon defeated him soundly, the Communists skulked away from Paris and suspended the negotiations.

In early December after the election, Nixon – in order to pressure the Communists back to the table – began bombing the immediate Hanoi area with B-52 bombers (a quantum escalation). Of course, the American anti-war media called it the “Christmas bombing.” As bombs fell within blocks of Hoa Lo Prison, pieces of plaster and debris fell from the ceilings of our cell blocks, but we POWs cheered on the bombers, knowing force was the only thing to which the Communists would respond. And after only three weeks, they did. They signed the Paris Peace Accords, which essentially ended the war, and prescribed the means for the release of all POWs.

-- Jerry Coffee, Midweek, February 6, 2013

medicare a good deal

(for the recipients).  And that's the problem...

It's not surprising that we can't pass a bill to address long-term budget deficits. Effectively all of the growth in projected long-term budget spending is health care costs tied to Medicare benefits. And -- surprise! -- voters really like Medicare benefits. According to a 2010 poll by the Tax Policy Center, three-quarters of Americans think entitlements like Medicare will create major economic problems over the next 25 years. But two-thirds oppose reducing benefits, and more than half oppose raising taxes.

Here's why: Medicare isn't just a good deal for retirees. It's an outstanding deal.

According to the Urban Institute (link opens PDF), a couple with average wages retiring at age 65 in 2010 would have paid $88,000 in dedicated Medicare taxes over the course of their lifetimes (including their employers' share) but can expect to receive $387,000 in Medicare benefits. A 65-year-old couple retiring in 2020 will have paid $111,000 in Medicare taxes and can expect to receive $427,000 in benefits.

Medicare taxes for most workers are currently 2.9% of income, where they've been since 1986. But median wages during that time grew by an average of 2.8% per year, while medical costs grew by an average of 5.5% per year. In order to have kept an equal ratio of Medicare taxes to Medicare expenditures over the last three decades, either taxes would need to have doubled or expenditure growth would need to have been cut in half. But remember the Tax Policy Center poll: Voters by and large refuse both options. This is why we have deficits.

That sentiment will probably grow in the future. In 1970, 10% of the U.S. population was age 65 or older. Today that's 14%, and by 2030 nearly 20% of the economy will be eligible for Medicare. How do you think these people are going to vote? Will they easily give up their investment-of-a-lifetime Medicare benefits? I doubt it.

There are a few likely ways this will end. Raising the age at which you become eligible for benefits is one of the more palatable options, but it doesn't do much to the deficit, as a disproportionate amount of health care costs are incurred when people are in their 70s and 80s. Growth in health care costs is coming in below what budget analysts expected. If that trend holds, most of the runaway-spending budget forecasts could be proven too pessimistic. More likely, Medicare growth will come at the expense of other government programs -- nondefense discretionary spending is already on track to hit a 50-year low as a share of GDP.

But here's what we know: The budget isn't hard to fix because politicians are evil or because one political party "doesn't get it." It's hard because what drives long-term deficits are programs that offer voters deals they can't refuse. Just pay a little now, and we'll give you a lot tomorrow -- who can turn that down? It's a dangerously good deal.

no mail for you (on Saturday)

The financially struggling U.S. Postal Service said today it will stop delivering mail on Saturdays but continue to disburse packages six days a week, an apparent end-run around an unaccommodating Congress.

The service expects the Saturday mail cutback to begin the week of Aug. 5 and to save about $2 billion annually, said Postmaster General and CEO Patrick R. Donahoe.

"Our financial condition is urgent," Donahoe told a press conference.

The move accentuates one of the agency's strong points — package delivery has increased by 14 percent since 2010, officials say, while the delivery of letters and other mail has declined with the increasing use of email and other Internet services.

Under the new plan, mail would be delivered to homes and businesses only from Monday through Friday, but would still be delivered to post office boxes on Saturdays. Post offices now open on Saturdays would remain open on Saturdays.

Over the past several years, the Postal Service has advocated shifting to a five-day delivery schedule for mail and packages — and it repeatedly but unsuccessfully appealed to Congress to approve the move. Though an independent agency, the service gets no tax dollars for its day-to-day operations but is subject to congressional control.

Congress has included a ban on five-day delivery in its appropriations bill. But because the federal government is now operating under a temporary spending measure, rather than an appropriations bill, Donahoe says it's the agency's interpretation that it can make the change itself.

"This is not like a 'gotcha' or anything like that," he said. The agency is essentially asking Congress not to reimpose the ban when the spending measure expires on March 27 and he said he would work with Congress on the issue.

The agency clearly thinks it has a majority of the American public on its side regarding the change.

Postal Service market research and other research indicated that nearly 7 in 10 Americans support the switch to five-day delivery as a way for the Postal Service to reduce costs, the agency said.

The agency in November reported an annual loss of a record $15.9 billion for the last budget year and forecast more red ink in 2013, capping a tumultuous year in which it was forced to default on billions in retiree health benefit prepayments to avert bankruptcy.

The financial losses for the fiscal year ending Sept. 30 were more than triple the $5.1 billion loss in the previous year. Having reached its borrowing limit, the mail agency is operating with little cash on hand.

The agency's biggest problem — and the majority of the red ink in 2012 — was not due to reduced mail flow but rather to mounting mandatory costs for future retiree health benefits, which made up $11.1 billion of the losses. Without that and other related labor expenses, the mail agency sustained an operating loss of $2.4 billion, lower than the previous year.

The health payments are a requirement imposed by Congress in 2006 that the post office set aside $55 billion in an account to cover future medical costs for retirees. The idea was to put $5.5 billion a year into the account for 10 years. That's $5.5 billion the post office doesn't have.

No other government agency is required to make such a payment for future medical benefits. Postal authorities wanted Congress to address the issue last year, but lawmakers finished their session without getting it done. So officials are moving ahead to accelerate their own plan for cost-cutting.

The Postal Service is in the midst of a major restructuring throughout its retail, delivery and mail processing operations. Since 2006, it has cut annual costs by about $15 billion, reduced the size of its career workforce by 193,000 or by 28 percent, and has consolidated more than 200 mail processing locations, officials say.

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Why would the USPS take such radical measures? The simple truth is that the postal service is a fundamentally sound business, though not without its challenges. If you look closely, you'll see a concerted campaign to drive USPS out of business, despite the fact that it operates without government subsidies and, potentially, at a profit. It's being subjected to a politically manufactured crisis in order to ram through drastic change. But without the USPS, citizens will face much higher costs without better service. Below, I outline three common misconceptions about the USPS and explain why they're misleading.