James Pethokoukis

At the heart of the economic case for U.S. healthcare reform is a simple comparison: Whereas America spends 16 percent of GDP on healthcare, the average across OECD countries was 8.9 percent, as of 2007.

So what do these frugal healthcare systems look like from the ground? T.R. Reid tries to find out in his book “The Healing of America: A Global Quest for Better, Cheaper and Fairer Health Care.”

In this health-policy travelogue, Reid visits a number of nations and interacts with their healthcare systems as he seeks help for a bum shoulder.

The main commonality is far from revelatory: lots more government. In one country, government determines the prices for medical treatment, in another it’s running the hospitals and employing the doctors.

So, too, would various Democratic plans for U.S. healthcare reform increase government intervention. Greater subsidies for the purchase of private insurance, new regulations on insurance companies, and, most likely, some sort of new government-run health plan.

But when one imagines what a post-reform American healthcare system might look like, there are two notable aspects in which it would still differ greatly from other OECD nations.

First, American doctors may pay as much as a hundred times more for malpractice insurance than their foreign counterparts, and will likely be sued several times during a career. Democratic healthcare reform would mostly leave this system in place.

But there is reason to believe that medical-liability reform could produce big cost savings. The Congressional Budget Office pegs the savings in overall healthcare spending at $110 billion over 10 years.

Some private estimates are far higher. A new study by the healthcare analytics unit of Thomson Reuters (http://r.reuters.com/nuc85f ) finds that defensive medicine — such as overuse of antibiotics and lab tests — by malpractice-jittery doctors costs the United States as much as $300 billion a year.

Another important difference is in what healthcare providers are paid. Reid’s book is full of examples of spartan medical facilities and doctors compensated more like high-end New York Times reporters than low-end Manhattan hedge fund managers.

Yet seeking to appease the doctors lobby, Democrats recently tried and failed to shield physicians from $250 billion in Medicare reimbursement cuts over the next decade. Expect them to try again.

Can ObamaCare “bend the curve” of rising healthcare costs? Not if it attempts to pay for reform more through higher taxes than by cutting compensation for doctors and trial attorneys.

An analysis by IHS Global Insight looks at unemployment in major metro areas:

Looking ahead, payrolls will be rising in most metros for consecutive quarters a year from now, but the unemployment rate will have shown little improvement, as employment gains will not be sufficient to absorb enough job seekers.  A third of metro areas will have jobless rates in double digits in the fourth quarter of 2010, with 16 exceeding 15%.  … By the end of 2012, the jobless rate will still be above historic norms, but it will finally slip below 8% in more than half of metro areas.

Andy Xie paints a dire scenario:

Central banks around the world have released massive amounts of money in response to the current financial crisis … But the proposition that a weak economy means low inflation is false. The stagflation of the 1970s proves it.

This round of monetary growth has mainly fed speculation, not credit demand for consumption or investment. Speculation has reached a dangerous point with the oil price threatening to reach triple digits again. Its implications for inflation may spook the central banks to raise interest rates quickly and trigger another crash.The excess money supply has created a new liquidity bubble.

The resulting asset inflation (stocks and bonds in developed markets and everything in emerging markets) has stabilised the global economy. The current equilibrium is one on a pinhead. The hope for strong economic recovery led by emerging economies raises investor optimism – and asset prices. This eases pressure on corporate balance sheets, spurs property production and boosts consumption through the wealth effect, making the hope self-fulfilling in the short term.

A rising oil price threatens to derail this recovery. It can trigger a surge in inflation expectation and a major crash of bond markets. The resulting high bond yields may force the central banks to raise interest rates to cool inflation fears. Another major downturn in asset prices would reignite fears about the balance sheets of global financial institutions, leading to new chaos.

Watch CEA chair Christina Romer manage voter expectations:

Consistent with the recent cyclical pattern, the unemployment rate is predicted to continue rising for two quarters following the resumption of GDP growth. Whether this happens and how high the unemployment rate eventually rises will obviously depend on the strength of the GDP rebound. …  With predicted growth right around two and a half percent for most of the next year and a half, movements in the unemployment rate either up or down are likely to be small. As a result, unemployment is likely to remain at its severely elevated level.

The great Andy Busch of BMO Capital Markets effortlessly explains the link between the current anemic state of the dollar and America’s terrible fiscal situation:

The US fiscal deficit remains the major concern for US dollar reserve
holders and the situation is not improving. Granted, the peak of new
Treasury issuance occurred in August. However, there is no sign from
Washington that spending will be under control any time soon.

This is why you have seen this week US Treasury Secretary Geithner and
Federal Reserve Chairman Ben Bernanke all warn that the US fiscal
deficit must come down or risk disaster. They know that the US dollar
is weakening due to this red ink. 2009 fiscal deficit was an astounding
$1.4 trillion as spending increased from $3.0 trillion to $3.5 trillion
while tax revenue fell from $2.5 trillion to $2.1 trillion. The debt is
now at $12 trillion and is expected to grow by another $9 trillion over
the next decade.

Without any changes to health care, the CBO estimates spending for
Medicaid and Medicare is expected to grow $700 billion over the next
decade. With health care legislation conservatively estimated to add
another $900 billion to the deficit, the numbers are spiraling out of
control. Actually that phrase doesn’t do the situation justice. Maybe
the trailer for the movie 2012 is more appropriate.

Most disturbing is the combined level of federal, state, and local
government spending. According to the OECD, this totals up to 42% of
U.S. gross domestic product. Think about it: 4 out of every 10 dollars
of everything produce in this country is channeled through governments.
Quick poll: who thinks this is the most efficient way to run an
economy?

The point is that the US has embarked on a glide path of spending that
is making the currency weak and US dollar reserve holders knees weak,
too. The Federal Reserve appears to be the only one left in the
government who can do something about it by raising rates. With
unemployment expected to continue upwards, this is not expected to
happen soon.

This means that in the short term, the only change to the downward
direction for the US dollar has to come from outside the country. So
far, Brazil and Canada have acted. In the long term, the US has to act
to change spending or rates. Unfortunately, Congress is likely to
actually increase spending while the Federal Reserve is unlikely to
raise rates.

Therefore, the US dollar is likely to remain weak for a long period of time.

In the 1982 sci-fi film “Blade Runner,” it appears as if Japan is the world’s leading economy and culture. It is a cinematic portrayal of the future sketched by many economists in the 1980s who wanted America to adopt Japanese-style industrial policy. But America may yet have an economy that resembles Japan’s. This NY Times story looks at how Japan amassed such a huge national debt, twice the size of its economy:

How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.

The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.

The spending initially fueled Japan’s rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise.

The Democratic Party, which swept to victory in August, promises to rein in public works spending. But the party’s generous welfare agenda — like cash support to families with children and free high schools — could ultimately enlarge budget deficits.

“It’s dangerous for the Democrats to push on with all of their policies when tax revenues are so low,” said Chotaro Morita, head of fixed-income strategy at Barclays Capital Japan. “From a global perspective, Japan’s debt ratio is way off the charts,” he said.

Listened to an interesting talk today by Jared Bernstein, chief economist to Vice President Joe Biden, at a New America think-tank conference on job creation. A few observations:

1) If Bernstein’s talk was any indication, don’t look for much public celebration by the White House if we get some good 3Q and 4Q GDP numbers. As he put it, “Absent robust job growth, it is not a true economic recovery.” He stressed this point several times. I don’t even think you will hear an administration official use the word “recovery” in 2009.

2)  Bernstein trotted out several interesting slides — which I am hoping to get hold of — that displayed the severity of the job market’s woes. It really seems like the big problem is not so much layoffs as it is a lack of hiring. Thus the high numbers of long-term unemployed.

3)  He didn’t hint at much appetite for the grander second stimulus ideas like a job investment tax credit. (CBO would probably score such a plan as costing $75 billion a year or so, according to an earlier speaker.)

The great Dan Clifton of Strategas Group nails the difficulties of paying for reform through spending cuts or tax hikes:

But these goals are now in jeopardy as the process moves forward. Doctors want legislation to permanently fix their payments holding a cost roughly of $250bn and Senators are pushing for an expansion of coverage. Both initiatives raise the fiscal cost of healthcare program to roughly $1.2 trillion (violating the total cost goal) and there are no additional options to pay for this expansion (violating the deficit neutral goal). Not only is the cost of spending going up, but the push is now to lower the impact of the revenue raisers as unions push to reduce the tax on high end insurance plans. This provision is one-quarter of the total offsets for healthcare and reducing that further exacerbates the gap between revenues and spending. Also, this is viewed as a key provision to reduce the cost of healthcare and will added further headwinds to passage.

My pal Don Marron breaks it down:

A few days ago, CBO released its latest snapshot on the federal budget, documenting the remarkable challenges of fiscal 2009, which ended on September 30. The key phrase in the report is “in over 50 years” as in:

1) At $1.4 trillion, the budget deficit was 9.9% of gross domestic product, the largest, relative to the economy, in over 50 years.2) At $3.5 trillion, spending was almost 25% of GDP, the largest, relative to the economy, in over 50 years.

3) At $2.1 trillion, tax revenues were about 15% of GDP, the lowest, relative to the economy, in over 50 years. (I get the sense that this point is less well-known than the other two.)

America’s Health Insurance Plans, an insurance industry trade group, paid for this PricewaterhouseCoopers study that found Democratic healthcare reform would sharply raise the price of private healthcare insurance. The typical premium could rise by $4,000 by 2019. Here is the executive summary: