Rolfe Winkler

The rising costs of Medicare and Medicaid threaten to destroy the nation’s fiscal future, but President Obama is pushing for healthcare reform that would increase costs. Instead, he should refocus his presidency on paying down debt.

America’s obligations over the next 75 years now surpass $62 trillion, up 8 percent since last year. And a new report released today by the Peterson Foundation suggests that total will go even higher if the House’s health care legislation is passed.

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With today’s pliant bond market, it’s easy to pretend we can have things that can’t be paid for. But that’s the kind of attitude that led California into the fiscal abyss. We have to get serious about bringing our expenses in line with our income. Now.

Unfortunately Republicans and Democrats alike are more concerned with winning elections than passing good public policy. Republicans told us “deficits don’t matter,” signed a prescription drug benefit for Medicare that created a bigger fiscal hole than Social Security, waged two very expensive wars financed with debt, and borrowed to bail out banks.

For their part, Democrats complain about the deficit they “inherited,” then proceed to expand the bailouts, pass hundreds of billions worth of “stimulus,” and try to increase our health care liabilities over and above already unsustainable levels.

Partisan economists on both sides provide intellectual cover for this foolishness, but most Americans know better. They know our spending is unsustainable. They see what’s happened to California and know intuitively that government can’t deliver services it can’t pay for. Not forever.

Unfortunately, and this is what happened to California, the longer we wait to solve our fiscal mess, the more expensive it will be. The more we borrow today, the less we’ll have in the future.

If we wait, by the year 2040, Social Security will have gone from a small surplus as a percent of GDP (0.13 percent) to a substantial deficit (-1.34 percent). Medicare’s hospital insurance plan will have gone from a small deficit (-0.08 percent) to a huge one (-3.23 percent).

The Medicare trustees don’t provide estimates for the shortfalls of the two other Medicare programs, including for prescription drugs since, technically, there’s no shortfall: Congress has promised to fund the programs out of other government revenues.

But at that point there won’t be other revenues to spare. If nothing changes, by 2040, income taxes will be enough to cover only Social Security and interest on debt. National defense, education, Medicare, and everything else will all be unfundable. At that point income taxes would have to be doubled to put us back on a sustainable path.

But we won’t get that far. Long before most economists care to admit, foreign lenders will decide it’s no longer prudent to buy our bonds. That will be enough to cause interest rates to rise, hammering asset values and forcing the economy into a far deeper contraction.

The good news is that this problem can be solved a lot less painlessly if we confront it today. Unlike publicly-held debt, the unfunded obligations of Medicare and Social Security are promises that can be taken back.

So instead of making new promises he can’t pay for, Obama should co-opt the Republican platform of fiscal restraint. That worked pretty well for Bill Clinton after his own health care proposal died. By the end of his presidency, we were running substantial surpluses for the first time in generations. That’s the kind of change that overindulged Americans truly need.

But don’t expect that to happen. Obama and the Democrats will push some sort of health reform through Congress. Then they’ll congratulate themselves for expanding coverage — for getting more passengers on board a Titanic healthcare system that’s heading straight for an iceberg.

Personally, I like Joe Biden’s verbal gaffes.  They tend to throw public policy problems into stark relief.  Today, he’s reported to have uttered the following at an AARP town hall meeting on health care spending:

“Well, people when I say that look at me and say, ‘What are you talking about? You’re telling me we have to go spend money to keep from going bankrupt?’” Biden said. “The answer is yes, I’m telling you.”

Contrast with the testimony of Congressional Budget Office Director Douglas Elmendorf in front of the Senate Budget Committee today:

“In the [health care] legislation that has been reported, we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount….on the contrary, the legislation significantly expands the federal responsibility for health care costs.”

I understand the desire to achieve universal health care, especially when it comes to basic coverage.  Surely better preventive care and administrative efficiencies can achieve cost savings.  But, as Elmendorf argues, what’s being proposed won’t reduce costs.

In the meantime, this week total public debt outstanding increased $65 billion to $11.58 trillion.

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