Hope your Tuesday is going well! Though it's National Cereal Day, we're focused on Medicare funding and the debt limit, not Fruit Loops or Frosted Flakes. Here's what's going on:
Biden Pitches New Taxes on Rich to Help Save Medicare
President Joe Biden on Tuesday previewed his plan to address a looming Medicare funding crisis, proposing to extend the solvency of a key program trust fund by raising taxes on people making more than $400,000 a year and expanding Medicare’s newly established ability to negotiate drug prices.
In a guest essay for The New York Times and a fact sheet released to the media, Biden and the White House laid out the framework of a plan that they said would extend the life of the Medicare Hospital Insurance trust fund by at least 25 years without cutting benefits.
The trust fund, also known as Medicare Part A, is on pace to be depleted in five years, according to the latest annual report by the program’s trustees. “Roughly 60 million seniors depend on Medicare for their health insurance,” The Washington Post notes. “Because the program is spending money at a much faster clip than it brings in funding, it faces automatic federal cuts starting in 2028, raising the nightmare scenario of medical providers refusing care to senior citizens if Congress and the White House don’t address the looming shortfall first.”
Biden said in his State of the Union address last month and in other remarks since then that his budget plan would extend the trust fund by at least 20 years. The president has sought to contrast his plans for Medicare and Social Security with those proposed by some Republicans, which he insists will threaten those safety net programs.
“For decades, I’ve listened to my Republican friends claim that the only way to be serious about preserving Medicare is to cut benefits, including by making it a voucher program worth less and less every year. Some have threatened our economy unless I agree to benefit cuts,” Biden wrote in the Times. “Only in Washington can people claim that they are saving something by destroying it.”
Biden’s plan: As part of his budget proposal for fiscal year 2024, Biden proposes to raise the Medicare payroll tax rate from 3.8% to 5% on annual income above $400,000 and close a loophole that lets some business owners shield some income from the tax. The plan would also expand the Medicare net investment income tax and dedicate revenue from the tax to the Medicare Hospital Insurance trust fund. And it would expand the prescription drug pricing reforms enacted as part of last year’s Inflation Reduction Act, allowing Medicare to negotiate the prices of more drugs and extending the new rule that drug companies pay rebates to Medicare if they raise prices faster than inflation, applying the requirement to commercial health insurers.
The savings from those expanded reforms, which the White House says would total $200 billion over 10 years, would be credited to the trust fund.
The White House says that not only would the plan maintain Medicare benefits, but it would lower costs for beneficiaries as well. The plan calls for capping out-of-pocket costs for certain generic drugs, such as those used to treat hypertension and high cholesterol, to $2 per prescription per month.
The fiscal hawks at the Committee for a Responsible Federal Budget praised Biden’s effort to address Medicare’s finances. “Anyone who opposes the measures he suggests to lower prescription drug costs and raise new revenue should put forward their own ideas to address Medicare’s rising costs and looming insolvency,” said Maya MacGuineas, the group’s president.
Still, MacGuineas said it would be better to keep the prescription drug savings in Medicare’s Part D drug program and warned that simply redirecting net investment income tax won’t truly improve federal finances. “Absent offsetting measures, this part of their plan simply robs Peter to pay Paul and, in the process, would worsen the budget outlook outside of the trust fund,” she said.
Overall, though, CRFB says the plan would generate hundreds of billions of dollars to strengthen Medicare.
What’s next: Biden’s Medicare plan, like his budget overall, is likely to go nowhere in the House, where the new Republican majority opposes tax increases in general and is certain to oppose Biden’s proposed tax hikes specifically. “Their whole program and their whole vision is more taxes, and more government, and we’re the opposite of that,” Rep. Ralph Norman (R-SC), a member of the conservative House Freedom Caucus, told The Washington Post of Biden’s budget. Kyle Pomerleau, a senior fellow at the conservative American Enterprise Institute think tank, told the Post that Biden’s plan to raise the net investment income tax was less efficient and reliable than simply raising the payroll tax for Medicare.
But the president’s plan will certainly feature prominently in the re-election campaign that Biden is expected to announce soon.
“Republican plans that protect billionaires from a penny more in taxes — but won’t protect a retired firefighter’s hard-earned Medicare benefits — are just detached from the reality that hardworking families live with every day,” Biden wrote in his Times essay. “If the MAGA Republicans get their way, seniors will pay higher out-of-pocket costs on prescription drugs and insulin, the deficit will be bigger, and Medicare will be weaker. The only winner under their plan will be Big Pharma.”
Expect to hear lots more along those lines in the coming months.
Fed’s Powell Warns on Inflation and Debt Limit Fight
Federal Reserve Chairman Jerome Powell on Tuesday delivered new warnings about inflation and the debt limit.
In semiannual testimony before the Senate Banking Committee, Powell signaled that sharper interest rate hikes could lie ahead as the Fed looks to fight inflation that remains above its target level.
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Powell said. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Powell also warned lawmakers that, though the Fed does not play a role in the matter, they must raise the federal debt limit to avoid widespread economic pain. “Congress really needs to raise the debt ceiling — that’s the only way out,” he said. “If we fail to do so, I think that the consequences are hard to estimate, but they could be extraordinarily adverse and could do long-standing harm.”
What’s next: After racing to raise rates by a total of 4.25 percentage points over the course of 2022, the bank in February eased up a bit, lifting its benchmark rate by just 25 basis points. Now the Fed may feel the need to pick up the pace again. The Fed’s rate-setting committee will meet again on March 21 and 22, and while it will have a new economic data — including another inflation report, due out next week — to help guide its policy, markets increasingly expect the bank will again raise its key interest rate by half a percentage point.
“If the Fed did scale back up to a half-point hike, central bankers would be going against many of their messages from the past few months,” Rachel Siegel writes at The Washington Post. “Officials have argued that smaller, quarter-point increases give them more flexibility as they tiptoe up to the federal funds rate’s ultimate level. Rate hikes also operate with long lags, and policymakers have warned about the risks of going too far, too fast, especially since the Fed has the dual responsibility of controlling prices and also supporting the labor market.”
The bottom line: Analysts warn that the easiest part of the inflation fight may be behind us and that price increases could prove stubbornly sticky as the Fed tries to guide them back to a 2% annual rate. Powell’s hawkish turn Tuesday was meant to reinforce the Fed’s message that it won’t pull back too soon. “I think nothing about the data suggests to me we’ve tightened too much,” Powell said. “Indeed, it suggests we still have work to do.”
Debt Default Would Devastate US Economy: Report
What will happen if lawmakers fail to raise the $31.4 trillion debt limit before the U.S. Treasury runs out of cash to pay its bills in full and on time? According to a new report from Moody’s Analytics, a default on U.S. obligations would quickly push the economy into a recession and cost at least 1 million workers their jobs. And if the political deadlock over raising the debt ceiling were to continue for a significant period of time, the recession could spiral into a far more serious crisis that eliminates up to 7 million jobs and damages the U.S. economy for years to come.
The Moody’s report was highlighted Tuesday in a hearing of the Senate Banking, Housing, and Urban Affairs Committee’s Subcommittee on Economic Policy. Mark Zandi, chief economist at Moody’s, who authored the report along with Cristian deRitis and Bernard Yaros, told lawmakers that it is crucial for lawmakers to “increase, suspend, or eliminate” the debt ceiling well before the Treasury runs out of funds, which he estimates could occur by mid-August.
“There is a temptation to brush off the developing debt limit drama thinking it will end the same way as the others over the years with lawmakers coming to terms and signing legislation just in time,” Zandi said in his prepared remarks. “That seems a mistake given the heightened dysfunction in Congress and the large political differences gripping the nation.”
Zandi also cast doubt on the idea that the Treasury can technically avoid default by prioritizing its obligations, paying some debts, such as bond interest, while leaving other bills unpaid. “Bond investors, unsure of how this legal uncertainty would be resolved would demand a much higher interest rate in compensation," he said. "Moreover, politically it seems unimaginable that bond investors, that includes many foreign investors, would get their money ahead of American seniors, the military, or even the federal government’s electric bill for long.”
Asked by subcommittee chair Sen. Elizabeth Warren (D-MA) about Republican proposals to slash discretionary spending in exchange for agreeing to raise the debt ceiling, Zandi said that the potential cuts would likely cause a recession on their own. “Given the dramatic reduction in government spending in this scenario and the already fragile economy, the economy suffers a recession in 2024, costing the economy 2.6 million jobs at the worst of the downturn, pushing unemployment to a peak of near 6%,” he said. The damage would be lasting, Zandi added, eliminating a full year’s growth of GDP over a 10-year period.
Conservative experts agree on the need to move quickly: Douglas Holtz-Eakin, who ran the Congressional Budget Office during the George W. Bush administration and now leads a conservative advocacy group, called on lawmakers to raise the debt limit as soon as possible. “Failure to do so will inevitably lead to default on Treasury securities, generating global financial fallout, recession risks, and higher U.S. borrowing costs,” he said in his prepared remarks for the committee. Calling a potential default “a self-inflicted wound no one needs,” Holtz-Eakin noted that the debt ceiling is about spending that has already been agreed to and as such does not affect spending in the future.
Economist Michael R. Strain of the American Enterprise Institute said that Congress is running a risk by simply flirting with the potential debt default date. “Running up to the eleventh hour to raise the debt ceiling would be a substantial market and economic event that would leave U.S. taxpayers on the hook for billions of dollars of additional interest payments,” he said in his prepared remarks.
Strain also warned that the still-developing political dispute over the debt ceiling could damage the reputation of the U.S. in ways that could have real economic costs in the long run. “Is the United States a nation with a political system that is so dysfunctional that it cannot pay the bills it is legally obligated to pay?” he asked. “That question is at the heart of the uncertainty around the debt ceiling. The right answer to that question is: No. Congress and the President need to answer that question clearly by raising or suspending the debt ceiling as soon as possible.”
- Biden Eyes Tax Hike on Income Over $400,000 to Fund Medicare – Bloomberg
- Biden Says His Budget Plan Would Extend Medicare to 2050 Without Adding to the Deficit – NPR
- Debt Default Would Cripple U.S. Economy, New Analysis Warns – New York Times
- Debt Limit Action Needed by Mid-August, Analysts Warn – Roll Call
- Powell Opens Door to Bigger Rate Hike, Says Peak Likely Higher – Bloomberg
- US Debt Default Could Cause 'Longstanding Harm,' Fed Chair Jerome Powell Says – ABC News
- House GOP Takes Early Swipes at Biden Budget Before Fiscal Showdown – Washington Post
- Multiple House GOP Budget Plans to Showcase Divides on Cuts – The Hill
- In Oklahoma, a Freshman Republican Makes the Case for Deep Spending Cuts – New York Times
Views and Analysis
- My Plan to Extend Medicare for Another Generation – President Joe Biden, New York Times
- Biden Releases a Tax-the-Rich Medicare Plan, in Direct Challenge to GOP – Tori Otten, New Republic
- The American Rescue Plan’s Hidden Triumphs – David Dayen, American Prospect
- The Debt Ceiling Is the Risk Wall Street Doesn’t Want to Think About – Liz McCormick, Erik Wasson, Josh Wingrove and Mike Dorning, Bloomberg
- Powell’s Testimony Is a Sideshow. Follow the Data – Jonathan Levin, Bloomberg
- Why the Federal Reserve Won’t Commit – Jeanna Smialek, New York Times
- How to Restore Trust in Public Health – Leana S. Wen, Washington Post
- It’s Time for the GOP to End This Desultory Anti-Obamacare Crusade – Washington Post Editorial Board