Monday, November 21, 2005

Stop “out-of-control” Federal Spending

Democrats and many Republicans in Congress are calling for the rejection of the latest spending “cuts” arguing that they cannot be absorbed without undue pain. These cuts are in most cases reductions in growth and do not go far enough, in my estimation, and even if enacted will still result in a budget deficit above 4% of GDP.

The size and scope of government under a Republican President, Republican House and Republican Senate have seriously undermined the ability of the economy to grow at its full potential. To sustain the current level of growth in federal government spending, either long-term interest rates will rise or tax rates will increase at an unacceptably high rate. Both outcomes subdue economic growth.

The outrageous growth in federal spending is unrelated to political party affiliation, or to professed fiscal doctrines. Federal spending grew at a compound annual growth of 6.6 percent under George W. Bush, 6.5 percent under Clinton, and 7.1 percent under George H.W. Bush; so much for party discipline.

The real difference between Republican and Democrats is in how they would fund raucous spending growth. Both Bush senior, with a Democratic House and Senate, and Clinton raised tax rates in order to grow government receipts by 4.7 percent and 7.3 percent, respectively. George W. Bush has instead funded his federal spending growth by expanding the magnitude of the deficit while reducing tax rates (AMT aside).

Now the Congress is wrestling with extending the 15 percent capital gains tax rate on dividends. The five year “cost” of this extension to 2010 is estimated to be $21 billion. The House has passed the extension while the senate has not. Data indicate that failure to pass the extension will only allow federal spending to grow at an even higher rate and will punish the over 50 percent of Americans who hold stocks either directly, in mutual funds, or in their retirement accounts.

EPG

1 comment:

Jeff Milewski said...

These cuts cost more

The proposed cuts should be rejected not because they cannot be absorbed but because they are going to end up costing the government more money. A majority of the proposed savings are financed by squeezing the margins of pharmacies. Congress has decided that it is better to give more money to big pharma and less to the pharmacies when medicaid and medicare patients get their drugs. The new proposed reimbursement formula for medicaid prescriptions encourages pharmacists to dispense brand-name over generics. This will greatly increase the government's bill for prescription drugs. You might be confused if you are not familiar with the pharmacy business so I will try to explain what is happening. The current reimbursement formula encourages pharmacists to dispense generics over brand-name to patients on medicaid because they get a higher profit on generics. The new reimbursement formula uses Actual Manufacturers Price(AMP) plus a certain percent for both generics and brand-name drugs. This replaces the current formula of Actual Wholesale Price(AWP) plus a higher percent for generics and a lower percent for brand-name drugs. Generic AMPs are much lower than AWP. Also, having a constant percent added to AMP for both brand-name and generics causes problems. For example, a pharmacy will make more money on selling a brand name drug with an AMP of $100 then a generic with an AMP of $20, when a contant added percnet is used, like say 5%. The brand-name profit is $5 and generic profit is only $1. Which one would you sell? The governement pays $105 instead of $21. What this all means is that the cuts will cost more in the end and once again politicians are under the influence of big money from big corporations(big pharma to be exact). This bill will significantly hurt independent pharmacies who depend on fair government payments. So if you support small business and actually reducing the budget it would be a good idea to let you congressman know. Thanks for your time. Go Jays!