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Thursday, March 18, 2010

Telling it like it is

There is a sobering piece in the NEJM this week entitled:

The Specter of Financial Armageddon — Health Care and Federal Debt in the United States

This piece describes why the unfolding current political drama in Washington is really a distraction from the real issue that we will be facing in the not to distant future. There are a few key items highlighted.
The United States has a substantial, growing structural deficit, much of which reflects current and projected increases in federal spending on Medicare and Medicaid. This federal health care spendingamounted to 5% of the gross domestic product (GDP) and 20% of federal outlays in 2009 and is forecast to reach 12% of the GDP by 2050.1 Health care spending is thus a key driver of long-term debt. This does not mean that we cannot run a structural deficit, but deficits must be small enough that debt grows more slowlythan the GDP....
Projections made by the Congressional Budget Office in 2007, before the current fiscal crisis began, suggest that to finance federal spending, the highest federal tax bracket would have to rise to 92% by 2050, assuming health care spending grows 2.5 percentage points faster than GDP, which is approximately the historical average.3 A final option is cutting spending on valued public programs. For Medicare and Medicaid beneficiaries, this approach could mean large increases in cost sharing, poorer benefits, limited eligibility, and diminished access. For health care providers, it could mean drastic reductions in Medicare and Medicaid payments.

Basically when health care cost outstrips GDP growth, the miracle (tragedy) of compound interest will consume our economy. For virtually any party involved in this discussion, they have a vested interest in fixing this problem. As health care costs consume an ever growing portion of governmental resources, it will invariably crowd out something else. If you have a vested interest in maintaining or growing research funding, you should be on board for controlling health care inflation. If you believe it is important for those of modest means to be able to access and afford health care, it is important to find a solution which controls health care costs. If you believe it is important to have a growing economy and avoid financial calamity, it should be a priority to develop approaches match growth of health care to overall GDP growth.

Of course the devil in the details and that is where the politics kick in. We cannot delude ourselves into believing that we can spend our way out of this. The problem with addressing this as a political problem is there is little evidence that those who work in political sphere have the wherewithal to solve this since a solution will almost certainly require austerity measures unlike anything seen by any living American. It will involve political suicide and/or some sort of solution imposed from the outside.

We are seeing hints of this in other local realms. Municipalities, strapped for cash, are simply closing down services, laying off police and fireman, closing schools,  and stopping bus services when they do not have money to make payroll. The federal government is a little different. At some point the Feds will run out of options for borrowing and be forced to degrade the currency by simply printing more money ala the Zimbabwean model.

This does not have to happen. All it will take is coming to a consensus that we all need to make a sacrifice of some sort. This is a consensus which is hard to come by. I am reminded of a introduction from Samuel Bowles book on Microeconomics. The author describes traveling through Palanpur, a particularly poor  state in India. He meets a sharecropper and strikes up a conversation finding that it was common knowledge among local farmers that they would have better yields if they planted earlier. However, no single farmer was willing to do so since doing so alone would result is huge losses from the birds eating their seeds. They all would be better off if they got together and all planted earlier. When the author asked the sharecropper why they did not do so, the answer was, "If I knew how to do that, we would not be so poor."

The hardest problems involve coordination the activities of human beings. Our circumstances are not much different from those poor farmers in India.


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