April 16 (Bloomberg) -- How much should you worry about the level of federal government debt in 2075? The Congressional Budget Office forecasts deficits and debts out that far, and the numbers are eye-popping. According to the CBO, total debt is on a trajectory to reach 700 percent of gross domestic product.
The implication, of course, is that we are on an unsustainable path. Either we’ll face some sort of dramatic fiscal disaster or the government’s debts will more gradually become an unbearable burden. Either way, the budget and our political inability to bring it under control will surely derail growth. Or will it?
Forecasting is difficult, and looking out 65 years is essentially impossible. Would it have been smart if lawmakers made fiscal decisions in 1940 based on what they thought might happen in 2005? A projection in 1940 might have anticipated the huge fiscal costs of World War II, but probably would have underestimated the strong growth of the postwar period that reduced debt relative to GDP. It almost certainly would have missed the dominant demographic change of that period -- the jump in U.S. births from 20 to 24 per 1,000 in 1946, a rate that remained high until the early 1960s.
Other changes with first-order effects on the national debt include a big increase in the female labor force, the creation of Medicare and the rise in life expectancy. Today’s 65-year-olds can expect to live three years longer than those who turned 65 in 1970. Heck, the Red Sox even won the World Series.
We should put essentially zero weight on the precise numbers in any 65-year forecast, and we certainly shouldn’t make dramatic or disruptive changes today because some form of straight-line projection implies that health care will eat the economy.
There is an undeniable problem with health care, but this is more about the way the entire medical industry operates, not just what the government spends. For example, the main problem with the original approach to Medicare by Representative Paul Ryan, the Wisconsin Republican who is chairman of the House Budget Committee, was flagged by the Congressional Budget Office last year. By shifting costs to individuals, the Ryan plan would actually increase health spending as a percentage of GDP.
Ryan has since modified his plan by raising the cap on what the government would pay for seniors’ health care. Unfortunately, the CBO hasn’t assessed the effect this would have on total spending. In my assessment, however, the CBO’s point still holds -- shifting costs to individuals may discourage frivolous purchases but moves the balance of pricing power decisively toward providers and insurers.
Health care is a relatively concentrated market. Depending on the locality, either hospitals or insurance companies have significant pricing power. The federal government already pays the health-care costs of about 100 million Americans through Medicare, Medicaid, the veterans’ health system and other programs. Without question, the government could use its market power more effectively and run these programs better.
In any case, the average person’s market power is far less than the government’s, giving individuals little control over what they pay. Pooling a large number of people makes it possible to hold down underwriting risk; try insuring five people compared with 5,000.
Of course, rising health-care costs are unsustainable, but here’s a bold prediction: We’ll fix it. The International Monetary Fund’s September 2011 fiscal monitor offers a big hint on how to do this. At the back of the report, in the third and fourth columns of Statistical Table 9, the IMF reports on how increases in health-care spending will affect the budgets of industrialized countries and emerging markets. However you look at it, the U.S. is an outlier.
Every country is different, but all the countries with a grip on future health-care costs have some version of universal health care in a single-payer system. This is often mixed with coverage by private insurers, which aren’t necessarily chased out of business. Doctors earn high wages and other health-care providers still turn a nice profit in many of these systems.
Suggestions that the U.S. move to a single-payer system are often met with howls of “death panels” and other dire predictions. All the same, we’ll fix health care along these lines because, otherwise, the private sector will become completely uncompetitive. (I write more extensively in my new book about Medicare.)
The people running American businesses talk a great deal about how the U.S. tax system puts companies and their employees at a disadvantage relative to other countries. They make some good points and we should overhaul corporate taxes, preferably as part of a broader set of tax reforms that strengthen the revenue base. In 20 years, any adverse competitive effects of the tax system will likely be swamped by the high costs and other disadvantages of the health-care system.
Business leaders have to get a grip on this issue. Let’s start by phasing out the tax exemption for employer-provided health care (and use half the proceeds to reduce payroll taxes). This should help push the U.S. away from fee-for-service and toward a health system that will better serve the private sector and entrepreneurs in a global economy.
(Simon Johnson, a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics, is co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.” The opinions expressed are his own.)
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