As frantic (but ultimately doomed) efforts to reflate the decade long credit bubble continue, total US government debt, including state and local, has reached 100% of GDP, up from 72% in 2000 and just 45% back in 1982. Note that this figure doesn't take account of the bloated Fed balance sheet, since the convention is to treat the financial system bailout as a series of asset exchanges; it can be argued that since most of the bank assets the Fed swapped Treasury bonds for are worth a fraction of the exchange value, this understates public liabilities. It is also before plunging tax revenues as a result of the current recession fully impact public budgets, and the $787bn stimulus plan begins to be spent (the vast bulk of it on social programs rather than productivity enhancing infrastructure and research). Adding in corporate and consumer debt takes the US leverage ratio to 375% of GDP (from 150% back in 1982). Which brings us to the thorny issue of health care reform.
The US spends $2.5 trillion or just under 18% cent of GDP on health care. This compares to 11 per cent of GDP spent in notoriously hypochondriac France and almost double the 9 per cent in the OECD as a whole. Annual growth in health care costs has exceeded growth in US per-capita GDP by over 2% over the past 50 years, and this accelerating trend is clearly unsustainable. Medicare and Medicaid, the publicly funded parts of the US health care system, cover only 30 per cent of Americans, yet will suffer deficits of trillions of dollars in the next decade if present trends persist. From an economic perspective, healthcare is not a 'normal' good, where demand responds to price signals so some form of rationing is necessary to avoid disproportionate 'consumption' of its services. The U.S. system’s overall quality of care lags that in Europe according to every academic study, as evidenced by estimates of 100,000 deaths annually due to physician errors (despite a lawyer in every operating theatre) and adults receiving recommended care only 55% of the time. On every metric of patient satisfaction, preventive health care and population-adjusted mortality and morbidity results, the US gets bad value for money from its gold plated medical system. Under the new plan, millions of workers would get health cover from an insurance exchange rather than from their employer (although amazingly 37m would still be left totally uninsured by 2019). In other words, fewer workers would receive employer-sponsored health insurance. The CBO assumes that employers would still compensate those workers at market rates, but more of that compensation would be in the form of wages and salaries. That’s crucial from a revenue perspective because wages and salaries are subject to income and payroll taxes, but employer-sponsored health insurance is not.
Over ten years, the resulting revenue boost is substantial: almost $260 billion, which would cover about 20% of the increase in government spending of $1.3trn. That assumes, crucially, that employers don't just pocket the saving as margin, but increase worker compensation. Add the costs of this plan (about 10% of current GDP) on top of the existing debt trajectory, and the numbers reach a tipping point for creditors.
With trend GDP growth now probably 2% at best, and demographic decline looming, the US cannot conceivably repay the accumulated mountain of debt, let alone sustain ongoing deficit spending for the next decade with a health care plan on top. According to CBO data, the US Federal debt alone will hit 70% by 2010, but this is before a demographic tipping point pushes unfunded Social Security and Medicare budgets into huge deficit. The current value of these liabilities is about $60trn, or over 4 times the size of the US economy. The US has remarkably failed to generate any net new jobs this decade, while taxation is fast rising to European levels (60% marginal rate above $200k in NY by 2011 for example).
While the current rally in risk assets is driven by a reduction in perceived 'tail risk', particularly of a systemic meltdown in the financial system, it is highly likely that sovereign default risks will become a key concern for investors later this year, led by a further crisis in Eastern Europe, but with broader ramifications. Personally, I think there is a very simple solution to out of control health care costs. Between 25-33% of all healthcare spending in advanced economies is spent in the last year of a patient's life, as doctors take their Hippocratic oath to extremes regardless of any cost-benefit to the patient or society at large. That's why the demographic trend in the chart above is so financially ominous. We're going to have to limit medical intervention for terminal geriatric cases to palliative care only. To live better, we're going to have to learn to die better, but don't expect a politician to say it.
