Tax Analysts Blog

More Nails in the Fiscal Coffin

Posted on May 18, 2009

America's debt is out-of-control, and the bad news keeps trickling in. Last week started with the Obama administration releasing new budget projections showing that the federal debt is equal to 70 percent of GDP in 2019 (instead of 67 percent as projected in February). And new reports forecast that Social Security will run short of cash in 2037 (four years earlier than predicted last year) and Medicare will do the same in 2017 (two years earlier than predicted last year). The trust funds' deterioration was not unexpected and, as explained by the staff of the Senate budget committee, it is already baked into the baseline projections Congress is using in its formulation of the 2010 budget. But the reports are a photo-op reminder of our titanic entitlement funding problems.

The White House tried to whitewash these sad facts by simultaneously announcing Obama had finessed a voluntary commitment from the healthcare industry to cut the rate of growth of healthcare spending by 1.5 percent annually. The administration calculated this as a $2 trillion saving for the nation over 10 years. The President has reportedly called the agreement "a watershed event." White House budget director Peter Orszag called it "stunning." Sure, getting powerful healthcare lobbyists to sit in a room and appear cooperative may be a significant symbolic political achievement, but the soft commitment doesn't in any concrete way contribute to reducing healthcare costs.There are no procedures in place to implement the change. There is no monitoring of companies or industries to see if they comply. There are no enforcement mechanisms. And if by chance these cost reductions ever did materialize, most of the benefit would accrue in private-sector health plans and not in a reduction in Medicare and Medicaid costs that would reduce the deficit.

As weak as this achievement was, the private sector participants in the agreement are pulling back. Robert Pear reports that the industry groups clarified that they meant to commit to gradually reducing the rate of growth of healthcare spending to 1.5 percent and eventually get there after 10 years. By our calculations this means the $2 trillion in mythical savings is really only $800 billion in mythical savings.

Meanwhile the President's Democratic "allies" in Congress made a deal to mollify energy companies opposed to the administration's plan to control greenhouse gas emissions. Throughout the campaign and in his budget the President was counting on raising $629 billion by auctioning permits under a cap-and-trade system. According to some media reports, only 15 percent of the permits would be auctioned under the latest version of the House bill; the remaining 85 percent would be given away. Lost government revenue: a mere $535 billion.

Several commentators are sounding warning bells and urging the government to restrain its borrowing. NYU economist Nouriel Roubini wrote in the New York Times:

      If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. . . .This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles.

In the Financial Times, David Walker, former head of the Government Accountability Office, wondered out loud whether America's AAA bond rating was at risk, and he warned that healthcare reform cannot just be about expanding benefits (the focus current Congressional efforts):
      While comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.

Finally, there was a New York Times column by David Brooks with the cheery title "Fiscal Suicide Ahead." Brooks pointed out that the key to the administration's fiscal vision is cutting healthcare costs. But because these savings are uncertain, our nation's finances are on a precarious course:
      Right now, [Obama's] spending plans are concrete and certain. But his health care savings, which make those spending plans affordable, are distant, amorphous and uncertain. Without serious health cost cuts, this burst of activism will hasten fiscal suicide.

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