Cowen’s road
With a blog post titled “The Road to Medicare, not The Road to Serfdom,” Tyler Cowen got me to read his NY Times column in which Medicare is mentioned exactly once:
While we can expect a larger public sector in America, the cause is mainly the aging of the population, and it will play itself out over the next 30 years with an increase in government transfer payments, mostly through Medicare. Furthermore, even Professor Hayek favored welfare spending and social insurance, so those programs will not alone bring us to serfdom.
The message of the column, titled “A Pendulum Swing Toward Austerity,” is that (1) fiscal belt-tightening is back and (2) it should be. Point (1) is clear, though it remains to be seen whether anybody is really serious about it. Point (2) is the subject of the great argument between Paul Krugman and Niall Ferguson. That is to say, it’s at least debatable.
But what has this got to do with Medicare? Everything. Public health spending is the source of our long-term debt problem (see first graph below). What underlies that problem is not that Medicare is a public program per se, but that the rate of increase in health spending in general is too high. That is, the same health spending growth problem exists on the private side too (see second graph below). This message didn’t come through in Cowen’s piece. With the blessing of Hayek, Medicare got an easy pass. Why?
With a health spending problem like this–government health programs (Medicare+Medicaid) alone projected to gobble up 20% or more of GDP by late in the century–does anything else matter? No, except in political terms. The reason to fight about spending now is because the fight is really about something else (e.g. notions of liberty, ideological signaling, or political positioning). To actually solve the real long term problem requires a focus on health spending. Don’t sweat the rest.
By the way, the best line in the column, and one I whole heartedly agree with, is “[E]ffective political ideas are those that can still do good in half-baked form.” The Affordable Care Act has a few ideas in it about how to rein in Medicare and overall health spending. Are they at least “half-baked?” I think so. Will they work? Only if we let them.
One more figure (below) to bring it home. It’s from the Health Care Budget Deficit Calculator, produced by the Center for Economic and Policy Research. It shows the effect on the U.S. budget deficit as percent of GDP of a continuation of baseline health care cost trends (yellow line) and of a change to health cost trends of high income OECD countries (blue line). Yes, it’s all about health care.
Lost
Everyone is talking about the finale of Lost, or so it seems. I’m not. OK, I am a little. But I shouldn’t. I didn’t watch a single second of the series, not even a nanosecond. The last series I watched faithfully was West Wing. I miss it dearly. (A moment of silence please. … )
Speaking of Lost, we’re collectively lost on how to get a handle on federal debt and when. To help illustrate how lost we are, The Committee for a Responsible Federal Budget has produced a neat-o-cool budget simulator. The goal is to reduce the debt to 60% of GDP by 2018. The simulator walks you through all major federal programs and spending items and provides options to cut or expand them. You tick off your preferences and watch the debt grow or fall. The real-time graphical budget feedback makes it fun and instructive to see how hard it is to reduce the debt. I’ve seen it discussed by several bloggers and finally had a moment (=2π instants) to try it this morning. It really is worth a few minutes. So, stop thinking about Lost and check it out. (Off you go. … )
Welcome back! Wasn’t that interesting? Better than Lost?
What would make an excellent addition to the simulator is a political capital graph. Of course it isn’t hard to reduce the debt if you’re the king and have no concern for re-election and need not be bothered with a Congress. What makes reducing the debt doubly hard is that to get legislation passed you have to buy off policymakers. It’s not so easy to reduce here without growing over there. Propose enough reductions and enough new taxes and you’ll be out of office. If that’s what you wanted you probably wouldn’t have run in the first place.
In the budget simulator one gets no feedback as to how politically difficult each of the cuts would be. But maybe showing how reducing federal debt is even harder would be counter to The Committee’s goals. If it is evident just how hard it is, we might be inclined to give up and watch TV. Maybe Lost is more fun.
Debt, Medicare, Politics, Etc.
As per my post earlier today, there is at least one reader of this blog, along with his/her gang of macroeconomics-minded teens, interested in the U.S. debt. I’m guessing many other readers are interested in this topic too. To all such readers, please don’t expect me to be your sole source of information on it. That would be a big mistake.
But, reading Krugman on the topic would not be an obvious mistake. It just so happens that he put up a marvelous post moments ago that explains why he’s not worried about the U.S.’s current debt level. At the end it nicely ties into all the political footballs of the day, tightly spun in standard Krugman style.
What this means is that if you’re worried about the US fiscal position, you should not be focused on this year’s deficit, let alone the 0.07% of GDP in unemployment benefits Bunning tried to stop. You should, instead, worry about when investors will lose confidence in a country where one party insists both that raising taxes is anathema and that trying to rein in Medicare spending means creating death panels.
The title of Krugman’s post is “Debt is a political issue.” No kidding! It is worth a full read.
Your Share of U.S. Government Debt: One Year of Work
A reader wrote me,
In trying to explain to some teenagers what the importance of the national debt is to them, I decided to try and figure out how many years an 18 year old would have to work if he contributed every penny he made to pay off his current portion of the national debt. I am NOT an economist, and found relevant information confusing. I realize that the resulting figure would have some guesstimates in it (like how much an 18 year old would make in a year), but I’m stumped. Can you give me any ideas or direction?
I’m not an expert on the national debt, but I know enough to tell that this is a potentially loaded question (even if it wasn’t intended to be). What makes it loaded is that the extent and timing of concern over the debt are politically charged. That is, there is a strong temptation by some to use debt figures and projections to argue against spending and borrowing for things that might reasonably be viewed by others as good investments. For instance, a time of high unemployment is not an especially good time to tighten the fiscal belt even if it might someday require some tightening. Having said that, there is no harm in understanding the debt a little better. I could use some education in it myself. So here is what I can say about it. I will rely on readers to chime in with supplemental information. (Factual corrections, elaborations, and URLs to sober analysis and discourse welcome. Rants are not.)
The national debt is customarily broken down into two components, debt held by government accounts and debt held by the public. The former includes U.S. government securities held in the Social Security trust fund. According to Wikipedia,
As of 2008, Social Security Federal Old-Age and Survivors Insurance Trust Fund holds about half of the government held portion of the debt … with other large holders including the Federal Housing Administration, the Federal Savings and Loan Corporation’s Resolution Fund and the Federal Hospital Insurance Trust Fund.
Note that the official government held debt figures exclude Fannie Mae and Freddie Mac obligations ($5 trillion), as well as other loan guarantees made during the liquidity crisis of 2008-2009. Officially, the 2010 estimates for the size of the debt are $14.5 trillion in total, $4.6 trillion in government accounts and $9.9 trillion held by the public. The ordinary way of understanding the debt is to put these figures in terms of GDP: 98%, 33%, and 67%, respectively. Note that Paul Krugman is not alarmed by this or a substantially higher debt level, but James Hamilton is.
Putting the debt in terms of GDP already begins to address the reader’s question. In what follows I am implicitly assuming that the rate of growth of incomes and GDP equals the interest rate on the debt and that we do not incur any additional debt. Neither are good assumptions. (For historical and projected GDP growth see the Congressional Budget Office. For average interest rates on U.S. government debt see Treasury Direct. For potential debt growth see the Center on Budget and Policy Priorities.)
Ignoring a few details of the income method of GDP calculation, a total debt level of 98% of GDP (the 2010 estimate) could be paid off in one year if all but 2% of income and business profit was devoted to it (*). There are about 130 million workers in the U.S. So it would take about 130 million worker-years to pay off the debt.
But that way of looking at it assigns business profit to workers and also imagines that workers could spend their non-wage compensation on the debt. That’s not what the reader had in mind. So, another approach would be to consider the average lifetime earnings of a college graduate. It’s about $2.1 million. To pay down a debt of $14.5 trillion (the 2010 estimate) it would take the lifetimes of 7 million such individuals, or 7 million times the lifetime of one such individual, assuming that one individual would earn $2.1 million over each of his 7 million lifetimes of work. Of course the figure is higher if we only consider high school graduates, who earn one million dollars less. (I don’t know what the average lifetime earnings are for the mix of education levels that currently exist in the workforce.)
One works perhaps about 40 years in a lifetime, and 40 x 7 million years is 280 million years. (By way of reference, dinosaurs emerged about 230 million years ago.) That 280 million figure is higher than the 130 million years calculated above because it imagines using only worker income, not business profits or non-wage compensation, to pay off the debt. (Also, this is all very back-of-the-envelope so one should not be so picky.) But one individual isn’t responsible for the whole debt. If we assign an equal amount of it to each of the 312 million individuals in the U.S. as of this writing then we get back to something pretty close to one year to pay off one individual’s share of the U.S. debt burden (280/312 = 0.90).
So, to the reader who posed the question, go tell your teenagers to work a solid year and put every penny of earnings toward the debt. They’ll have to forgo all other consumption (food, shelter, clothing, transportation, etc.). Also, they won’t really be able to pay down the debt even if they wanted to. There’s no way for a citizen to do that. It’s a government decision. What I’d really tell them is to pay attention to the issues (it seems they’re off to a good start), read widely, think deeply, not to be fooled by populism, and to vote.
(*) National income is $12.5 trillion which is nearly 90% of GDP.
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