THE FINANCIAL CONDITION OF THE UNITED STATES

• First of all, a word about the US federal deficit.  As the New York Times recently reported, the US Treasury will soon face a “trifecta” of headaches:  a mountain of new debt; a balloon of short-term borrowings that come due in the months ahead; and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the financial emergency has passed.  With the national debt now topping $12 trillion, the White House estimates that the US government will need to service its debt at a cost of over $700 billion per year by 2019, up from $209 billion this year.  Some forecasters argue that the debt service could be much higher.  Put another way, an additional $500 billion a year in interest expense will total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.  There is therefore little doubt that the US long-term budget crisis is becoming too big to postpone, for the US government debt has doubled in the last two years alone!  The US will face, as the Times puts it, “. . . political battles over the size and role of government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should shoulder the burden.”  So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates the US must offer to sell them.  Indeed, the government paid less interest on its debt in 2009 than it did in 2008.  Investors have viewed Treasury securities as the least-dangerous place to invest.  In addition, the Federal Reserve has done everything it could to drive interest rates down. 

But all of this will change.  Investors are already shifting money to riskier investments like stocks and corporate bonds, as well as countries like Brazil and India.  And the Federal Reserve is beginning to end its actions, to some extent.  All of this means that the United States will need to pay much more to refinance its huge debt, for the upward pressure on government debt interest rates will intensify.  (An increase of 1 percentage point will cost an additional $80 billion.)  Estimates are that the US will need to borrow about $3.5 trillion more over the next three years.  On top of that the Treasury will need to refinance or roll over a huge amount of short-term debt that was issued during the financial crisis.  Treasury officials estimate that about 36% of the government’s marketable debt—about $1.9 trillion—is coming due in the months ahead.  The increase of debt-to-GDP will increase to almost unimaginable numbers.  For example, the Congressional Budget Office estimates that the Obama administration’s planned budgets will increase the debt-to-GDP ratio from 41% in 2008 to 82% in 2019.  We are up against a massive wall of debt!  What should the US government do?  There are really only four possible scenarios:

•  Raise taxes/cut services—the problem here is that so much of the obligations of the government are already committed—Social Security, Medicare and the interest on the debt.  Besides, to cut services or raise taxes is politically dangerous and probably will never happen.
• Inflation—permit inflation to rise, which would erode the value of the debt.  Foreign investors would be angry and the buying power and standard of living will fall.
• Default—this is hardly realistic for it would create a worldwide economic panic.
• Growth—if the economy grows significantly, then tax revenue would increase significantly as well, allowing the government to pay down debt.

Obviously, none of these solutions is attractive, but one of these will occur.  Except for the last one, all are terribly painful.  The US will now need to deal with its profligacy and its entitlement programs that are now out of control.  Remember as well, that none of these projections factor in realistically the cost of a new health care package.

• Second, consider the effects the various health care proposals will have on the United States.  Mortimer Zuckerman, editor-in-chief of US News and World Report, argues that the new programs being proposed in Congress will increase our health insurance premiums for the typical family by more than $1,200 per year and roughly double health-care spending in the next decade from approximately $2.2 trillion, or 16.2% of GDP in 2009, to over $4.3 trillion, or 20.3% of GDP by 2019.  “And this is based on estimated ‘budget cuts’ that cannot be relied upon.”  Furthermore, history tells us that we simply cannot rely upon projections about health care.  The House Ways and Means Committee projected that the first-year cost of Medicaid would be $238 million; instead, it was over $1 billion.  It now costs 37 times more!!  Medicare is no better.  In 1965, Congress estimated that it would cost $12 billion in 1990, when its actual cost was $90 billion.  The number of Medicare beneficiaries from 1985 to 2005 rose 37%, but the total Medicare spending jumped by the astounding factor of 372%, from $71.4 billion to $336.9 billion.  As Zuckerman contends, “The same underestimation of costs undoubtedly applies to the roughly $900 billion proposal before Congress.  The true costs are understated because most of the provisions that expand costs do not take full effect until 2014. . . The ‘reform’ bill’s unfunded liabilities would exceed $9.2 trillion.  That is breathtaking.”  We are on the path of fiscal meltdown!!  The current administration has put this entire health care debate under the pretense of moral superiority.  Medical care is now a right and the US government will ensure that you have a way to pay for this right.  In effect, the creation of a new entitlement program is not morally superior; it is incompetency in governing.  This legislation, whatever its final form, will most likely produce an unsustainable deficit and the ultimate collapse of this economy.  The US simply cannot expect to borrow the costs of the health care proposal.  This is not in the national interest.

See Robert Samuelson in Newsweek (23 November 2009), p. 21; Mortimer Zuckerman, US News (December 2009), pp. 95-96; Edmund Andrews in the New York Times (23 November 2009).

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