American Austerity: Medicaid Panic in Illinois

In my 2010 book Remaking America: Welcome to the Dark Side of the Welfare State, I explained that when a welfare state reaches a certain point of maturity its taxes and regulations weigh down the private sector so heavily, that the welfare state can no longer meet its spending obligations. When this happens, there are two choices: either we try to save the welfare state by pretending that we can still maintain all its spending programs, or we recognize that the welfare state has failed and dismantle it in an orderly fashion.

Europe’s welfare states reached this point of maturity already in the ’80s and ’90s. Since then their responses have been a combination of even higher taxes and austerity programs. The latter strategy means, plain and simple, that we maintain the same taxes as before, and formally maintain our spending programs, but we start cutting the amount of money we spend through these programs.

As I explain in Remaking America, this austerity strategy has turned Sweden from one of the most prosperous countries in the world into a poor country by comparison. Swedes now get about half as much for their tax dollars as Americans get for theirs – adjusted for the federal deficit. This is what austerity does to us: it forces us to pay the same amount as we did before for government services, but government delivers products – education, health care, welfare, income security – of deteriorating quality.

So far America has not seen much of austerity, especially not on the scale they have in Europe. But it is coming here, step by step, and the reason is that our legislators are not willing to make the obvious choice: an orderly retreat from the welfare state. Instead they are trying to keep the very same programs that are driving our federal, state and local budgets into the red. This means getting on the austerity train, which is exactly what Illinois Governor Pat Quinn is doing. From The Chicago Sun Times:

Gov. Pat Quinn said he plans to cut the state’s Medicaid spending by $2 billion as a painful but necessary way to attack the state’s budget crisis. … Last year Quinn proposed cutting the state’s Medicaid budget by $600 million. The state Senate cut that to $300 million and in the House of Representatives, “Democrats and Republicans banded together and announced they would take ‘zero percent’,” Quinn said. He plans to triple down and try for a bigger cut.

The choice to do nothing is obviously as bad as choosing the austerity route. It only postpones the inevitable: the realization that the welfare state is costing the private sector more than it can pay for. The longer our elected officials wait with dealing with their excessive spending problem, the bigger the panic when they do. As I explain in my new book Eliminating the Welfare State, budget panic means austerity, which means destructive budget cuts. The only alternative is a structured, orderly retreat of the welfare state.

Obviously, neither the governor of Illinois nor the state legislators in the Prairie State are willing to embark on such an orderly retreat, at least not yet. In the meantime, they are running out of taxpayers’ money:

What exactly will [the governor] cut? Quinn said he would spell that out in his budget address in two weeks. But it involves changing the state’s Medicaid program into a “wellness system” instead of a “provider payment system,” he said. The problem he faces is that cuts to Medicaid can mean cuts to federal matching funds.

That is one of the problems. There are others. But just to highlight the spending problem, let us take a look at Illinois state Medicaid spending data (as reported by NASBO):

  • In 2005 Illinois spent $10.99 billion on its Medicaid system (excluding SCHIP). Of that, 49.9 percent came from the federal government;
  • In 2008 Illinois spent $13.82 billion on Medicaid., of which 47 percent came from the federal government. This represents a 26-percent spending hike in three years;
  • In 2011, according to NASBO estimates, Illinois spent $14.35 billion on Medicaid. The federal share had now gone up to $7.6 billion, or 53 percent.

While the increase from ’08 to ’11 was a modest 3.8 percent in three years, the long-term trend prior to that has been steadfastly upward. Spending has gone up way more than taxpayers have been able to keep up with. The practical meaning of that is that the state, at some point, either would run a persistent deficit or have to raise taxes. Illinois has done both, and for obvious reasons it has not solved the cost crisis imposed by programs such as Medicaid.

It is time for the state lawmakers and the governor in Illinois to rethink their attitude to entitlement programs. It is time to start separating the essential functions of government from its non-essential functions. Then, it is time for a structurally well-planned elimination of entitlement programs such as Medicaid.

It is time, in other words, for an orderly retreat from the welfare state.