More Guns and Butter

By: Hans F. Sennholz | Wed, Dec 1, 2004
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Medicare was born in 1966 when the war in Vietnam was escalating relentlessly, costing the lives of more than 15,000 American soldiers during the year. When the war threatened to divert funds from President Johnson's "War on Poverty," the President stuck to his contention that it was possible to have both guns and butter. The Vietnam War drew to an end in 1973 when a cease-fire agreement was reached and American troops were withdrawn. The war on poverty has dragged on ever since and Medicare has grown manyfold.

In the footsteps of President Lyndon B. Johnson, President George W. Bush now stands his ground that we may have both guns for Iraq and butter for his society. Last year, upon his urging, Congress added another Federal entitlement program - the first major addition in a generation - Medicare for prescription drugs. It does not begin until 2006 and then phases in over a number of years before becoming fully effective. And on July 15 of this year, Health and Human Services Secretary Tommy Thompson announced that Medicare's regulatory body sanctioned the treatment of obesity as a disease, which Medicare regulations had heretofore denied. The new program will allow Medicare henceforth to pay for obesity treatments including diet pills, weight-loss activity, and "stomach stapling." It is likely to become a popular and expensive staple of Medicare, given the ubiquity of obesity throughout the United States.

We may have our doubts about Congressional Budget Office (CBO) estimates of present Social Security liabilities of $7.2 trillion and Medicare liabilities of $37.6 trillion. We may take exception to other estimates of total unfunded liabilities amounting to some 6.5 percent of gross domestic product and the prescription drug expansion increasing long-term liabilities by one percent, and the obesity expansion probably adding one to two percent. But it is indisputable that Medicare benefits constitute costs that are borne primarily by taxpayers. They pay well over 80 percent of costs of hospitalization, extended care and home health services, physicians'services, and other essential medical services and supplies for members 65 years of age and older.

A massive benefit system such as Medicare is a heavy stress and strain system. Separating the beneficiaries from the bearers of the costs, it is hated and loved. It is political war without end with many victories and defeats. It is unlikely that future taxpayers will willingly and promptly square the account. They will be loath to double and triple Medicare levies in order to meet the benefit obligations. In all probability they will want to imitate us and not only shift the inherited liabilities to their offspring but also add some of their own.

Social Security and Medicare levies presently still cover current expenditures. But the day is bound to come when benefit expenditures will exceed tax revenues. The levies will have to be raised or the U.S. Treasury will have to finance the deficits. It probably would add these deficits to its own.

All along, the demand for Medicare services is bound to accelerate with the array of services offered at bargain rates. In a free and open medical market the supply would readily adjust to the rise in demand by way of soaring prices. But it is scarcely conceivable that the legislators and regulators who created the benefits and boosted the demand will allow medical doctors, hospitals, and all other providers to boost their charges. They will want to manage and hold back the costs by way of various price and fee limitations and other regulatory constraints. But, as every student of economics is fully aware, any price held below market levels is bound to cause shortages. The size of the spread determines the severity of the shortage.

A shortage of service may not be readily discernible; it first makes its appearance as a deterioration in the rendition and quality of service. Patients may have to wait long hours for treatment as the ratio of doctors to the ever rising patient demand declines. The average time doctors get to spend with patients gradually declines. Shortages of nurses and other staff depress the morale and strain the relationship between doctors and patients. Medicare paperwork and bureaucracy waste time and effort, raise costs, and aggravate the shortage. Legal costs may soar as doctors always run the risk of violating countless Medicare rules and regulations. Appalled by the conditions, many physicians seek early retirement.

The legislators and regulators who administer and supervise the system will do everything in their power to withstand the visible decline in service. They may confront the providers with growing contentiousness and assertiveness; their rules and regulations may multiply. But they may also support the industry with favors and subsidies of many kinds. They may encourage and assist medical education and, above all, encourage immigration of young doctors from poor countries. Immigration of medical personnel promises a ready inexpensive solution to the decline. More and more doctors speaking with foreign tongues and accents will take care of the patients.

President Johnson's guns-and-butter policy led to painful social and economic upheaval. Soaring budget deficits together with Federal Reserve easy money introduced the unprecedented phenomenon of both rising prices and rising unemployment. In August 1971 President Nixon finally froze all prices, wages, and rents. He devalued the dollar in December 1971, further in 1973, and again in 1974. Surely we cannot see what the future may bring, but the lamp of experience may guide our steps. It casts dark shadows on President Bush's guns-and-butter policy.


 

Author: Hans F. Sennholz

Hans F. Sennholz
www.sennholz.com

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