Why Health Care Matters and the Current Debt Does Not

In October 2011, the St. Louis Federal Reserve Bank published the report Why Health Care Matters and the Current Debt Does Not.

 The overwhelming obstacle to a sustainable fiscal path for the United States, regardless of the size of the current debt, remains health-care spending.

In discussing a figure published in the report, the authors draw three key inferences, to wit:

  1. If growth in government spending on health care and Social Security is matched by growth in government revenue, the cost of servicing the debt, and moreover the debt itself, will largely stabilize as a percent of GDP from 2020 to 2030. In other words, the current level of the debt is not by itself an obstacle to fiscal sustainability.
  2. If, on the other hand, the government increases spending on health care and Social Security without raising additional revenue, the debt, and the cost of servicing the debt, will skyrocket toward unmanageable levels.
  3. As a share of GDP, outlays on Social Security are expected to largely stabilize by 2030. Hence, the overwhelming driver of increases in government spending is health care.

These points were often made by President Obama in justifying his drive at the beginning of his Presidency to focus on what came to be called The Affordable Care Act (ACA).  When people wondered why he focused on this, rather than the debt problem, his point was to remind people that reining in the cost of health care was THE way to solve the long term debt problem.

One point that President Obama did not make strongly enough is that the unrestrained rising cost of health care will overwhelm our economy no matter who pays for it.  Even if the government paid nothing toward the cost of health care and individual people and business bore the entire burden, the cost of health care would still overwhelm the economy.

Since the passage of ACA, President Obama seems to have forgotten the key message.  In all the cries about getting our fiscal house in order, the President needs to keep pointing out that the passage of the ACA is the first step to doing just that.  Attacking Social Security and Medicare is not part of the solution.  Repealing ACA rather than fixing it and improving it will be a giant leap away from fixing the long term debt problem.

The problem of the long term debt is not that the Government could not produce enough money to cover that debt.  The problem is that the economy could not produce enough goods and services to meet the needs of the costs of health care and meet all the other needs of the people of this country.  It does not make any difference what you use as the measuring stick (U.S. money as is now done or some other proxy measure), the productive capacity for making real goods and services is the ultimate limit on what can be done.

The Fed report mentioned here was the center of the previous post How to Talk About Debt and Deficits: Don’t Think of an Elephant*, however, I think its significance and the points it made were lost in the shuffle of that post.

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