The coming recession

Higher tariffs, rising inflation, slashed government spending, more uninsured -- what could possibly go wrong?

The early grift drift of Trump administration economic policy has thrown the financial prospects for millions of working Americans into doubt, which may well send the U.S. economy careening toward its next downturn.

Government employees and contractors; university scientists, administrators and students; health care providers (18% of U.S. GDP); clean energy and electric vehicle producers; the food, hospitality and restaurant industries; primary and secondary education: All face sharp cuts in their government-dependent budgets and/or turmoil among their immigrant-dependent workforces.

In the sector I follow closely — health care — layoff notices are already an almost daily occurrence. Mass General Brigham in Boston this week announced the largest layoffs in its history, driven in part by sharp reductions in research funding. The Queens system in Hawaii, the Jefferson Health and Lehigh Valley Health Network in eastern Pennsylvania, and the Baystate Health in western Massachusetts have announced hundreds of layoffs in recent days.

The GOP-controlled House budget that will be unveiled tomorrow will contain sharp cuts in non-defense domestic spending. Projected health spending, which includes Medicaid but not Medicare funding, is slated to rise just 1.7% next year. That’s well under the current inflation rate of 3% (announced this morning) and just a third the medical inflation rate.

House Speaker Michael Johnson (R-LA) held a press briefing yesterday “to reassure the public — and potential jittery members of their own caucus — that the Medicaid changes under discussion include work requirements and fraud reduction, not drastic cuts like lowering the federal match for Medicaid expansion states or instituting a per capita cap,” according to The Hill.

“Medicaid has never been on the chopping block,” Johnson said. “If you eliminate fraud, waste and abuse in Medicaid, you’ve got a huge amount of money.”

In flagrante delicto

Both statements are flagrantly disengenuous. Let’s start with the second one first.

A recent Government Accountability Office report found that waste, fraud and abuse in the Medicare and Medicaid programs in 2023 accounted for just 5% and 6% of their total spending, respectively. The combined estimate of $101 billion in waste at the two programs (about half in each) was $33 billion less than the rest of the government combined, most of which occurs at the Pentagon. The military, it should be pointed out, has failed to pass a government audit for seven consecutive years (the only recidivist government agency) and has been repeatedly lambasted by the GAO for waste in its biggest aircraft and weapons programs.

As I reported two weeks ago, the Trump administration, by firing the HHS and 16 other inspector generals, is in the process of decimating the government’s ability to investigate waste, fraud and abuse. But even if it initiates a crackdown, there is no way that recoveries could begin to cover the massive cuts in Medicaid spending that the House Budget Committee included in the projected budget that will be subject of a first hearing on Thursday morning.

It is instructive to compare the projected GOP changes in Medicaid spending in that document to other programs. Medicare, for instance, which the Trump administration has repeatedly promised not to touch, is slated to rise 6.1% next year and a cumulative 27.1% over the next four years. Medicaid, by contrast, is slated to rise a cumulative 9.6%, just a third of its sister program.

That can only be accomplished by a) cutting people from the program; b) cutting program expenses (by shortchanging health care providers even more than they are being shortchanged by the program now); c) cutting the federal share of the program and forcing states to either raise taxes or be the executioners in the program; or d) some combination of the above.

This is precisely what was called for in the Project 2025 blueprint for health care that Trump claimed to know nothing about during the campaign. It was written in part by Russell Vought, who now runs the Office of Management and Budget. That document’s marching orders for health care, drawn from the Congressional Budget Office’s annual report on options for reducing federal spending (note that they are options, not recommendations) include:

• Turning the federal match for the states into a block grant that grows only at the rate of overall inflation, not medical inflation ($921 billion less for the states over ten years);

• Slapping a per capita cap on federal support ($934 billion less for the states);

• Reducing the federal match for people on Medicaid earning up to 138% of poverty (the Medicaid expansion in the Affordable Care Act that all but 9 states have adopted) to 50% from 90% ($670 billion cut from state support over the next decade);

• Targeting states with more generous programs (virtually all of them “blue” states) for even larger cuts by removing the federal match floor of 50% ($600 billion less for the targeted states).

Rather than talk about the fiscal disaster such policies would impose on nearly every state in the union, the GOP-led House and Senate will focus on imposing work requirements on Medicaid beneficiaries. Demonizing the poor saves next to nothing for the program (an estimated $109 billion over ten years) while costing states about $65 billion over the same period.

It would also throw about 600,000 people into the ranks of the uninsured. That’s not that many in a program that covers about 80 million people. As Sara Rosenbaum, a professor of health law and policy at George Washington University pointed out yesterday in an article in Health Affairs, two thirds of poor adults in the program already work either full-time or part-time; 10% don’t work because of disability; and 22% don’t work because they care for a family member or are in school:

“The real risk of work requirements comes from the failure to recognize and apply certain exemptions and the extreme difficulties of navigating the red tape of reporting requirements. Navigating reporting systems is especially problematic for lower-wage earners because work hours can change so frequently and work may come in seasonal cycles, leaving workers temporarily short of the minimums they must meet and unable to keep up with reporting rules. The complex reporting system has also meant that disabled people, older adults and caregivers who are on paper excluded still end up losing their Medicaid coverage.”

The states that tried work requirements in recent years — Arkansas and Kentucky — saw them struck down by the courts. Now, under Gov. Sarah Huckabee Sanders, Arkansas has again leaped to the forefront by asking the new Trump administration to allow them. As the leading newspaper in the state editorialized earlier this month after she announced the state’s waiver application:

“A work requirement for Medicaid will add cost and bureaucracy. It will make our already poor health outcomes worse. It will burden hospitals with patients who can’t pay. Using a blunt instrument to enforce a politically self-serving value judgment will not make lower-income people healthier, nor our state better off.”

The sharp cutbacks in the program contemplated by the GOP will lead to millions of people being eliminated from the program, many of whom will become uninsured. This will be on top of the estimated 4 million people who will drop coverage for 2026 when the expanded premium tax credits included in the Inflation Control Act passed under President Biden expire. That number will grow to 7.4 million by 2030.

Given the GOP’s desire to find offsets for the more than $2 trillion they need over the next ten years to pay for reauthorizing the tax cuts for corporations and wealthy individuals, which passed in 2017 (the sole legislative accomplishment of year one in the first Trump administration), the likelihood they will renew the premium tax credits is nil. Contrary to Speaker Johnson’s statements yesterday, the likelihood they will abstain from imposing big cuts in Medicaid is also close to nil unless the Democrats in Congress figure out a way to block them.

Economic impact of Medicaid, ACA cuts

Which brings me back to the state of the overall economy. When people are uninsured, they don’t forgo health care. They wait until they are so sick they have to access the system, usually in the emergency room where care is the most expensive.

That raises costs for providers, who, because they are constrained in what they can charge Medicare or Medicaid, turn to their only source of more revenue: the privately insured. That means 2026 insurance rates will rise sharply for the 180 million workers and family members with employer-based coverage. That will all become known in the fall.

As employers look at these additional wage costs, they will do what they always do when confronted with rising health care costs: Increase their employees’ premiums, co-pays and deductibles; eliminate benefits; and eliminate jobs. This reduces consumption of other goods and services.

This won’t be good for the rest of the economy.