Currency Wars, Class Warfare, and the Republican Dilemma Over Medicaid

Yves here. Trump is desperately looking for spending cuts to allow for tax cuts as DOGE has come way short of its promises (except in the “doing harm” category). The eye of Sauron has now turned to Medicaid, after the initial bright idea of targeting Medicare was shot down. But enough GOP Congresscritters are in districts where supporting Medicaid cuts would amount to re-election suicide that this is turning into a pitched battle. For instance, from The Hill:

House GOP moderates are telling Republican leaders they will not walk the plank and vote for Medicaid cuts in the party’s “big, beautiful bill” only to see the Senate strip them out — their latest warning shot in the effort to enact President Trump’s legislative agenda.

In the past, GOP leaders have corralled the conference around more conservative pieces of legislation to gain leverage over the upper chamber, cajoling centrists to take politically painful votes with hopes that they would help realize a more right-leaning final product…

This time around, however, moderates are putting their foot down, making clear that they will not back a more conservative Trump agenda bill that includes poison pill measures — namely drastic changes to Medicaid — as a negotiating tactic.

And the New York Times points out why Medicaid cuts would be, um, problematic, in The Biggest Medicaid Cut Left for House Republicans Would Hit Red States Hardest:

For months, Republicans have been trying to figure out how to reduce Medicaid spending to help enact President Trump’s domestic agenda. But their list of possible cuts is shrinking.

House Speaker Mike Johnson said Tuesday that major cuts to the Affordable Care Act’s Medicaid expansion were off the table. Now, the largest cut left among their whittled-down options would disproportionately hurt states that supported Mr. Trump in the 2024 election.

Republicans have also been studying several other Medicaid changes for their budget bill…But they have considered only two major policy pathways that can deliver the bulk of the $880 billion in spending cuts that the House committee overseeing Medicaid has been charged with finding.

One policy would significantly dial back funding for the Obamacare Medicaid expansion, which the Congressional Budget Office estimated Wednesday would save $710 billion over a decade. Some of the deepest cuts would be felt by rich, Democratic-led states. This was the option Mr. Johnson ruled out for now after meeting with moderate Republican members this week.

The remaining big cut on the table, limiting the way states use a tax loophole to increase federal spending on Medicaid, would save $668 billion, mostly by reducing Medicaid spending in poorer, Southern states.

Whichever states get hit hardest would face big budget shortfalls, and to compensate some could drop Medicaid’s health insurance coverage for some of their lower-income adults, cut hospital payments, or cut other government priorities.

The budget wrangling will be an interesting indicator of how Trump is faring. His approval ratings have fallen sharply, particularly on the economy, and are at a very low level for a president this early in his term. At the same time, Republicans normally exhibit solid party discipline and Trump makes a point of being vindictive (not that he can necessarily be effective if his political trajectory continues to decline). A fresh story confirms that Trump’s domestic momentum is on the wane. From Politico:

Senate Democrats on Thursday voted down a procedural motion that would allow the upper chamber to take up landmark GOP-led cryptocurrency legislation, delivering a stunning blow to Republicans on one of their first major policy pushes since clinching a trifecta.

The upper chamber voted 48-49 not to proceed on the crypto bill, squashing the effort following a chaotic week of negotiations in which the GOP backers of the legislation sought to win over a group of key Democratic holdouts.

All Democrats and three Republicans — including Sens. Rand Paul of Kentucky and Josh Hawley of Missouri — voted against the effort, which required 60 votes to advance. Democratic negotiators pushed to delay the vote until next week to give them more time to circulate potential changes with members, but GOP leaders plowed ahead.

“We need time,” said Sen. Ruben Gallego (D-Ariz.), who voted for a previous version of the bill in committee and helped lead negotiations for Democrats this week. “We’re not shutting down. We don’t want to shut this down to the point where we are ending all this work we have put into it. We want to bring this economy and this economy and this innovation to the United States.”

The vote is a major loss for Senate Majority Leader John Thune and other pro-crypto Republicans, and it could jeopardize a broader GOP effort to advance several pieces of industry-friendly digital assets legislation this year. Thune voted against the bill and entered a motion to reconsider, which will allow him to bring it back up on the floor.

By Thomas Ferguson Research Director for the Institute for New Economic Thinking, Professor Emeritus, University of Massachusetts, Boston and Jie Chen, University Statistician, University of Massachusetts. Originally published at the Institute for New Economic Thinking website

News reports indicate that bargaining between the White House and Congressional Republicans over next year’s budget is now intense. It is easy to understand why. The President’s efforts to restructure the world economy via tariffs have inspired vast opposition, generating deep misgivings even among many of his strongest supporters within big business. A failure now to extend his signature 2017 tax cut legislation might well fatally damage his standing among business leaders who have so far soft-pedalled their misgivings.

But President Trump’s efforts to increase his sway over the Federal Reserve have stalled. In the short run, at least, it is clear that the Fed will not cut rates as long as it perceives inflation to be a serious threat. And, rightly or wrongly, anxieties that the tariff increases will lead to higher inflation are running rampant.

This redoubles the urgency of the long-running campaigns by big business and finance to cut the federal budget deficit. The tax cuts are heavily weighted toward the wealthy. And the evidence is now compelling that in recent years, consumption spending in the US has been driven heavily by affluent Americans. Extending the tax cuts without cuts in federal spending elsewhere will push up total demand for a long time to come in an economy that, at least until “Liberation Day,” was widely considered to be at least slightly inflationary.

It is obvious that if the tax cuts are extended without major cuts in the rest of the budget, the Fed will be even more reluctant to cut rates.

This will pose problems for the White House at several levels. The outcry from deficit hawks, already deafening, will become even shriller. Perhaps a more immediate threat, however, is the implication for US exchange rates. The White House international economic policies have never been principally about tariffs. The incessant talk about a new “Plaza Accord” stems from the administration’s aspiration to bring off a kind of hat trick in international economics: lower the value of the dollar relative to its major trading partners, while maintaining its status as the world’s leading currency. Though right now the US and its trading partners are light years from any accord, the dollar has dropped substantially against its trading partners. With central banks in many other countries cutting rates, that will not persist for very long if the Fed holds firm.

Which brings us to the problem Republicans have with cutting Medicaid. We hope it is now obvious that economic appeals to lower-income Americans were always basic to Trump’s appeal in earlier elections and that the one-sided emphases by most analysts on racial and cultural appeals left out a crucial component of his allure.

Trump has for now ruled out reducing Medicare, whatever doubts about a future breakdown of the program may have been sown by the way DOGE was allowed to rage through its famously lean structure. Budget trimmers have thus focused on Medicaid, which provides care for the least affluent Americans.

Data from the AP VoteCast 2024 General Election survey shows the dilemma facing the Republicans right now. Table 1 displays how voters for both Trump and Harris felt about expanding Medicaid in their states.

Table 1: Majorities of Both Trump and Harris Voters Favored Medicaid Expansion

Source: Authors’ calculations from AP VoteCast 2024 General Election

Reading down the column for the Republicans shows segments holding views that arguably fit caricatures of “country club” Republicans: They “strongly oppose” or “somewhat oppose” expanding the program. But a heavy majority of Trump voters favor expansion either “somewhat” or “strongly.” [1]

Right now, Republicans championing major cuts have their work cut out for them. Many are touting the program as wasteful and demanding work requirements. With compelling new evidence coming in that Medicaid spending is highly effective and that work requirements are a futile waste of time and resources, how they resolve their dilemma will reverberate in both markets and politics for a long time.

Note

[1] The split and a look at other surveys convince us that concerns about rationalization and issues that sometimes arise in surveys are minimal in this case.