U.S. Economic Future

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Truckee bomb, 1962
Truckee bomb, 1962

The picture depicts what will happen to the U.S. economy around 2020 to 2025, if the United States does little to nothing over the next 5 years about the federal budget and Medicare/Medicaid deficits. It is easy to rationalize that our politicians will not allow this to occur. However, there is nothing easy, or even likely, about how that can be accomplished. In fact, the odds are against our politicians effecting the changes needed to avert the next Great Depression. Outlined here are the nuts and bolts about that future and the near impossible choices facing our politicians. There is a way, however.

First, some definitions. The deficit is for a fiscal year which runs from October of the previous year to September of the following year, (i.e. the 2010 deficit was for the period from Oct. 2009 through Sept. 2010). Obama's first year budget resulted in a deficit (spending less revenues) of $1.29 Trillion dollars. The previous year's budget deficit, 2009, which began in Oct. 2008 with Pres. Bush's last budget, was $1.42 Trillion. The current estimate for the proposed 2011 budget deficit is 1.27 Trillion dollars but, more on that, in a moment.

America's current federal debt is at, or just shy, $14 Trillion dollars. That federal debt (often called erroneously, the national debt) is an accumulation of annual deficits that began in 1969 and followed the last year our federal government had produced a surplus of revenues, until Clinton's last budget year. President Bush inherited a $5.67 Trillion national debt his first day in office with another $233 billion to be added before his first budget. The year he left office, that debt had grown to more than $10 Trillion, with another trillion plus to be added by Bush's 2009 'great recession' budget deficit. (1)

Wikipedia reports on the 2011 budget deficit:

The United States Federal Budget for Fiscal Year 2011, is a spending request by President Barack Obama to fund government operations for October 2010-September 2011. ... The budget did not pass [in 2010], the first time since 1974, and on September 30, 2010, the Congress voted on a continuing resolution, to keep the government running until December 3, 2010. On December 22, 2010, the Congress voted on another continuing resolution, to keep the government running until March 4, 2011.

The current estimate for the proposed 2011 budget deficit is $1.27 Trillion dollars, which would bring the national debt to more than $15 Trillion dollars by Sept of 2011. To compare that debt level to historical periods, one must view the debt level as a percentage of Gross Domestic Product (GDP, or total economy worth.) $15 Trillion is a huge debt, but, it has been worse during WWII, as a percentage of GDP. The following chart demonstrates this (click for larger view).

For the next couple years, the economy is going to improve as it has this last year, despite the higher than average unemployment rate. That means, even if spending remains the same, the deficits are going to come down as the federal government's tax receipts increase as a result of more economic activity, more people working, and more businesses and investors paying higher tax dollar amounts on increasing earnings. The Congressional Budget Office's baseline projection reflects this drop in the deficit to below $600 billion dollars by the 2014 fiscal year, after which, it rises steeply to 2020; and there's the worry.

A combination of things account for that steep rise in deficits after 2014. As the economy recovers, interests will rise. And the interest payments on that $15 Trillion federal debt will rise along with them, to an estimated 3/4 of a trillion dollars per year. One receives nothing tangible in return for long term interest payments. All the things government spent money on in deficits will have faded out of existence, the wars in Afghanistan and Iraq, 9/11 recovery,  Katrina recovery, tax reductions to the corporations and wealthy, but, the interest payments on those will continue as the first and foremost budgetary obligation for many, many years to come. Paying out 3/4 of a trillion dollars per year and getting nothing back in return for it which helps the economy, is what Benjamin Franklin might have referred to as penny wise and pound foolish. We saved our pennies from higher taxes in the first 10 years of this new century, but, we will paying out many times those pennies in interest for decades to come. 

Medicare/Medicaid and health care cost inflation constitute the real gorilla that will defeat our economy at the end of the decade, pushing our debt to GDP ratio even beyond that experienced in WWII. Unlike the 1940's however, America won't have a vast untapped workforce to bring online in manufacturing and export trade to developing nations. With incredible automation innovation, American workers are being replaced at a stunning pace by computers and machines and other automated processes. This is, in fact, one of the reasons job recovery is so sluggish today. Cash flush business has been using the Great Recession to upgrade automation replacement of more expensive human labor in nearly all areas of our economic industries from banking to agriculture to airplane meals preparation. Combined with the export of jobs overseas to lower wage labor markets, there is a new and ugly statistic coming our way. 

A new 'normal' unemployment rate is going to set in over the next couple years. Very likely at, or around 7 to 7.5%, versus the previous average of 5 to 5.5%, which represents about 1.5 million jobs before the Great Recession that won't be filled again. That means less consumption dollars being funneled through the economy, fewer goods and services being purchased, and less goods and services sold in the U.S. as opposed to overseas where middle classes are growing at a rapid pace. What will those 1.5 million new permanently unemployed do with their lives? That's a question left to another article at another time. 

Medicare and Medicaid deficits are the target if we are to rescue our nation's economic future. The following CBO estimate chart paints a clear picture of what we are facing in federal deficits. (Click to enlarge.)

CBO Estimate (2008)

CBO Estimate (2008)

As the chart indicates, the single greatest budget buster, and most important thing our politicians can do to prevent government default on its debts over the next decade, is to halt this spiral in health care costs. The solution however, is the most difficult thing America will tackle since perhaps, the Civil War, if America tackles it at all. The reason is simple and political. Many conservatives want to simply end the entitlement programs. While that would appear to solve the growing deficit problem at first glance, it is not a solution the American people will stand for, and therefore, neither will the majority of our politicians. 

An AP-GFK Poll (PDF) poll, conducted last Nov., reveals the public's view on cutting Medicare/Medicare entitlements. Summarizing the poll, ValleyNewsLive.com reports:

For example, 61 percent of Americans overall favored raising Medicare taxes to avoid a cut in benefits. The current payroll tax is 2.9 percent on wages, evenly divided between workers and their employers. The new health care law added a surcharge of 0.9 percent on earnings over $200,000 for individuals and $250,000 for couples filing jointly. When forced to choose, even a majority of Republicans said they would rather pay higher taxes (53 percent) than cut benefits (38 percent). Among adults in their 20s, who'd face a whole career paying higher taxes, 61 percent said they would be willing to pay more to preserve benefits. Only 29 percent of boomers said keep taxes the same but cut benefits.

There will be hell to pay by politicians who attempt to deprive Americans of their benefits paid for all their working lives. And that is what complicates, enormously, the potential solutions. But, raising taxes to keep benefits the same, is not the solution either. If Medicare/Medicaid taxes were raised to pay for the program without deficits, consumer demand for all other products would plummet over the next few decades, causing massive layoffs unemployment, and other kinds of federal aid deficit spending to aid the new and growing poor class in America. This is a compound multiple problem. Not only will the number of Medicare/Medicaid beneficiaries nearly double over the next couple decades, but, the costs of end of life care are rising dramatically per individual, and will continue to do so, without intervention.

CBS' 60 Minutes program last August reported: 

Last year, Medicare paid $55 billion just for doctor and hospital bills during the last two months of patients' lives. ... [Dr.] Ira Byock, told "60 Minutes" correspondent Steve Kroft it costs up to $10,000 a day to maintain someone in the intensive care unit. Some patients remain here for weeks or even months; one has been there for six months. ... A vast majority of Americans say they want to die at home, but 75 percent die in a hospital or a nursing home. "How do so many people end up in the hospital?" Kroft asked Dr. Elliott Fisher, a researcher at the Dartmouth Institute for Health Policy. "It's the path of least resistance," Fisher said.

The institute did a detailed analysis of Medicare records for patients in the last two years of their lives. Fisher says it is more efficient for doctors to manage patients who are seriously ill in a hospital situation, and there are other incentives that affect the cost and the care patients receive. Among them: the fact that most doctors get paid based on the number of patients that they see, and most hospitals get paid for the patients they admit.

"The way we set up the system right now, primary care physicians don't have time to spend an hour with you, see how you respond, if they wanted to adjust your medication," Fisher said. "So, the easiest thing for everybody up the stream is to admit you to the hospital. I think 30 percent of hospital stays in the United States are probably unnecessary given what our research looks like."

Health care profits for everything from a medical education to corporate hospitals, pharmaceutical, and insurance companies, are the Wall St. ticket for investors. Add a near doubling of the number of people entitled to Medicare/Medicaid over the next couple decades, and the fact that 75% currently die in a hospital or nursing home, and one quickly sees why we the government will be shelling out well over 100 billion dollars per year just for dying Medicare / Medicaid beneficiaries in the not so distant future. Premiums won't begin to cover those rising costs. The present value of unfunded obligations under all parts of Medicare during FY 2009 over an infinite horizon is approximately $36 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall, assuming the program continues indefinitely - (Board of Trustees - PDF).

It is not, however, just the Medicare/Medicaid costs that will bankrupt America. It is health care spending overall. As the chart below indicates, spending on all other all other health care items excluding Medicare/Medicaid, is rising even faster. And that means ever increasing percentages of the American consumer dollar being pulled away from all other consumer categories, undermining the well being of business in all other business sectors in the domestic economy, which in turn, will result in greater unemployment pressures and lower real wages to pay for health care as competition for jobs increases.  

CBO Health Spending

CBO Health Spending

The single most important effort by our government politicians in addressing our economic viability is to find ways to halt the spiraling health care inflation overall. It has to be remembered here, that the American people are not about to relinquish quality health care for themselves or their loved ones. So, the solution has to preserve quality health care while driving down its costs. There are many options to accomplish this, but, none of them will be politically palatable for our politicians as a majority. Here are just a few examples:

  • Move toward non-profit health insurance and medical care providers.
  • Dramatically increase hospice care for the terminally ill and die at home options which a majority of Americans would prefer for themselves.
  • Slow the pace of pharmaceutical R&D, thereby cutting the inflation of prescription drugs
  • Promote healthier lifestyle habits, thereby, reducing the incidence of early onset chronic health problems like diabetes
  • Promote intermediate educated health care practitioners like nurses and physician's assistants handling far more of the lesser health care needs, with legal safe harbors against malpractice of an unintended nature.
  • Vastly increase the number of health care practitioners lowering the competitive wage inflation for health care providers

As one can readily see, Democrats and Republicans will be loathe to agree on any of these potential solutions. Allowing 84 million boomers to suffer and die without health care or insurance, is simply not a viable option.

The last, and most promising of solutions, is one of the public forcing politicians into solving the problem. Voting out incumbents, advocated by organizations like VOID, and refusing to vote for candidates who aren't serious about viable solutions, is the one way to force politicians, eventually, to yield to the will of the American public and solve the damned problem, however unpalatable that may be politically. No politician wants to be voted out of office and both parties want to remain the majority for more than one election cycle. That is their vulnerable spot. The voting public will have to hit them at this underbelly election after election, and eventually, the Democratic and Republican Parties will come to their senses and recognize that their prize of power can only be achieved across elections by yielding to the voters and solving the problem.

Of course, that creates one very tall order for the media to educate the public on just how dire the situation is becoming and what their option is, to get it resolved. But, the media is far wider today than the corporate outlets, and the internet can increasingly become the media for educating the voting public on this issue, which threatens their financial and economic future in America.  

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This page contains a single entry by David R. Remer published on January 18, 2011 10:14 PM.

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