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MEDICARE PRESCRIPTION DRUG BENEFIT
Below is an excerpt from the Government Accounting Office (GAO) U.S. Financial Statement detailing their view as to how much future spending we are committing to in regard to the prescription drug so-called "benefit" program.
"Furthermore, the new prescription drug benefit has significantly increased the federal government's commitments associated with the Medicare program. Specifically, in their 2004 report, the trustees estimated the present value cost to the federal government of this new benefit over the next 75 years to be $8.1 trillion as of January 1, 2004."
The GAO claims it will cost 8.1 trillion over the next 75 years at "present value cost". I generated the chart below directly from the Congressional Budget office table at: http://www.cbo.gov/showdoc.cfm?index=5668&sequence=2 detailing projections for "net change to direct federal spending" of the drug benefit.
THE CBO PROJECTED ANNUAL "NET CHANGE TO DIRECT FEDERAL SPENDING" FOR THE MEDICARE PRESCRIPTION DRUG BENEFIT (anchor)
The Prescription Drug Benefit program doesn't begin to pay benefits in earnest until 2006. The chart above smoothes to relative predictability in the last 6 years, beginning in 2008 (yellow bars). But the Office of Management and Budget (OMB) projects drug spending will be much higher than the CBO projects. The White House figures released in February of '05 estimate that it will cost 1.2 trillion over the 10 years ending 2015. The CBO table over the same period (using Microsoft Excel to project the last 2 years) totals less than half that. Still the CBO underestimate provides the only published table that I can use to project forward. Based on the latest White House admission it is probably conservative to double all of the CBO based figures below.
The chart below (anchor) uses Microsoft Excel to continue CBO projections for future drug spending labeled "net change to direct federal spending" on http://www.cbo.gov/showdoc.cfm?index=5668&sequence=2 . On this basis the CBO projected amounts, from 2008 continued to 2043, will exceed 8.4 trillion, 2004 dollars, over 35 years, as opposed to the GAO 8.1 trillion over 75 years, if there is no further inflation of our currency. Each bar represents that single year's spending. Double the number for White House adjustment.
The next chart below (anchor) represents a direct Excel trend projection of the CBO table http://www.cbo.gov/showdoc.cfm?index=5668&sequence=2 for "net change to direct federal spending" going out 75 years. By their own numbers, Excel projected, spending in just the year 2082 alone would be over 14 trillion, with a total of over 190 trillion 2004 dollars being spent over the 75 years, as opposed to the GAO 8.1 trillion total over the period. Remember even the White House in 2005 suggested that the CBO numbers represented a little over 1/2 of the actual cost, so it is probably safe to double these numbers. If you doubt that Excel growth trend can be used this way I did a projection of M3 from 1959-1968, projected to 2004 here, and only missed by a couple of years in a projection of 35 years.
Microsoft Excel uses an average historical rate, from 1959 to present, of approximately 8% compounded, to project the growth trend of M3 forward. Below is a chart that compares the relationship of M3 money stock, to Industrial Production. The growth in the supply and resulting value of fiat money is necessarily set by an arbitrary setter of values. Even if it were reasonable, to say that the only excess M3 provided, was that supplied above the rate of industrial production, M3 would have still grown 8 times faster than the rate of industrial production so you can reduce these estimates by 1/8, and then double for the White House figures of underestimate.
To get a handle on how much of M3 money stock growth could be defined as inflation, it might be instructive to consider a Hershey chocolate bar. The only limitation in its supply since 1959 has been demand. In 1959 it cost 5 cents while today it costs 85 cents. Here is a link to a chart of the Hershey Bar Index.
The next chart, below (anchor), adjusts drug spending for money stock growth, or M3, or inflation, or faux money growth at the Excel Growth Trend rate, factored into the projected CBO http://www.cbo.gov/showdoc.cfm?index=5668&sequence=2 annual drug spending totals above. Excel Growth Trend for M3 demonstrates a little over 8% compounded based on the last 10 years of M3 and a little under 8% compounded based on the last 45 years. Spending in the single year of 2028, in 2028 dollars, is projected to be over 1.3 trillion dollars.
Drug benefit spending projections adjusting for M3 currency dilution show that over 8.7 trillion, 2028 dollars, are burned by the 21st year beginning in 2008, as opposed to the projected CBO 36 year 8.8 trillion, or the GAO 75 year 8.1 trillion. Note that the 21st year would include over 1.3 trillion 2028 dollars worth of spending in that single year, primarily because by 2024 our money stock would have been multiplied by about 5 times at historical M3 growth rates projected forward. If you want to adjust by "Hershey Bar Index" inflation, reduce the number by 1/10 to 7.92 trillion. If you don't think this spending is possible, I agree. But history demonstrates that we have been irrevocably on this road for some time. At least since 1959 the M3 money stock has been more than doubling every 10 years, on average.
Below is a chart (anchor) of Prescription Drug Benefit spending projected out 75 years using Microsoft Excel to extend CBO projections for "net change to direct Federal spending", and adjusted for historical rates of M3 money stock growth. Each bar represents that SINGLE YEAR'S SPENDING. Spending in the 75th year ALONE is projected to be over 5.6 million billion (or 5.6 thousand trillion if you prefer) 2083 dollars. If you want to adjust this number by excess M3, or inflation, lower it by 1/10 to be conservative, to 5.04 thousand trillion. If you want to adjust by "Hershey Bar Indexed" inflation conservatively, use 90% of the amount, or 5.04 thousand trillion. And the democrats accused the republicans of not spending enough!
If the figures above are difficult to grasp try using logic. Take the GAO projected 8.1 trillion over 75 years at "present value cost". Dividing 8.1 by 75 we get 108 billion per year average over 75 years. In the first CBO chart above, using the CBO's own numbers http://www.cbo.gov/showdoc.cfm?index=5668&sequence=2 for "net change to direct federal spending", you can see that annual spending will be nearly HALF of 108 billion, by the fouth year of program payouts, and by the 8th year it would have already reached the average that it is supposed to cost over the following 67 years.
Imagine if the government had started this program 75 years ago, in 1930, and used accounting for the "present value cost", and availability of drugs at that time. By 1934 annual spending would have already reached a rate of half of the average annual spending allocated for the next 75 years, and by 1938 would have exceeded the average annual allocation for the remaining 67 years.
For relative dollar value consider 1928 instead of 1930 since that was the peak of the "Roaring 20s" bubble, and preceded the market crash and depression. In 1928 U.S. average annual individual income was $750 compared to $23,276 today. It is obvious what this would indicate regarding drugs at "present value cost" in 1928. However the inflation was not uniform over this period since most of it has happened since 1960. Additionally, imagine how vast the array of available drugs were at the time. Put another way, if the government had set out to spend 8.1 trillion over 75 years in 1928, using the rate of 108 billion per year, and adjusting only for the rate of change in average annual individual income from 1928 to 2004, THIS YEAR'S SPENDING ALONE would be increased by a factor of 31 times, which WOULD EQUAL 3.34 TRILLION in 2004 dollars because of depreciated 1928 dollars. Additionally this 75 year period of wage inflation includes the deflationary depression years of the 1930s. This exercise clearly demonstrates the irrelevance of the GAO calculation based on "present value cost".
However a look at M3 over just the last 46 years shows the money stock has been multiplied by a factor of 33 times SINCE 1959. From the M3 chart you can see that dollar inflation really took off under Greenspan, and particularly in the last 9 years, when the entire volume of ALL MONEY created from thin air by the Fed since 1913 was DOUBLED, as is manifest most conspicuously in our housing bubble. Now imagine this exponential rate of dollar devaluation projected forward 75 years and what it would do to the costs of this drug so-called "benefit" program in 2083 dollars! Here is a chart of historical M3 Excel projected forward 75 years where we find the money stock totaling almost 4,000 trillion dollars, compared to today's "paltry" 9 trillion.
The CBO numbers further no doubt fail to adequately consider the increasing popularity of the program prompting greater individual participation, drug innovation and the subsequent array of new drugs coming on-stream, increasing cost of drugs, increases in population, and exponential increases in longevity, even in the very short term, as many in the field of medicine are predicting.
Perhaps the only way the GAO numbers would work is with a massive pandemic that wipes out the elderly, or perhaps by a deep, decades long, deflationary depression. Since the Prescription Drug Benefit promises to further U.S. financial instability and increase dependence on inflows of foreign capital http://www.publicdebt.treas.gov/opd/opdpdodt.htm to finance our debt, perhaps in the end it will be shown to have been correct to figure 75 years out in "present value costs" as a result of economic depression.
Today's housing bubble appears to be accelerating to catch up with M3. We don't buy drugs from the Chinese either (yet). Should we expect the growth rate in drug cost and government drug financing to look like anything but an exaggeration of our national debt chart anyway, especially since Medicare is the primary debt growth culprit, according to the GAO report? Does anybody trust the CBO for honest numbers anyway? The OMB doesn't even seem to, nor the White House. Why do you suppose it is, that the CBO ended their projections after only the first 10 years? My guess is that the growth figures that Excel projected above are conservative in comparison to what they discovered.
To put the figure for projected prescription drug spending into perspective, drug spending IN THE SINGLE YEAR OF 2083, is projected to be 5.6 thousand trillion in 2083 dollars, using the CBO table and adjusting for Excel projected M3, while 75 year TOTAL ACCUMULATED DEBT, at current rates projected to 2083, is 1.4 thousand trillion in 2083 dollars. The 75 year TOTAL ACCUMULATED M3 to 2083, increasing at the same rate as it has for the last 46 years, is "only" projected to be 4 thousand trillion in 2083 dollars. In other words the maestro (Greenspan) is going to have to speed up the printing presses if he expects to monetize future drug spending!
"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.'" - Ayn Rand - Atlas Shrugged