Monday, June 08, 2009

Two paths for the US

There are two clear paths for the US Federal Government over the next 10 years.

1) The "Put the house on the market and start shopping for an apartment in Beijing Plan" --- If we continue with current spending patterns without additional taxes, we are looking at trillion dollar deficits for a decade. After a couple of years, we'd be bumping up again 100% of debt to GDP which is considered by many to be the point of no return. If we cross these thresholds, prepare for much higher interest rates, dollar devaluation and fairly substantial inflation.

It's worth noting that many of the current estimates under this scenario include 3% economic growth, low unemployment, low inflation and massive savings from health care reform. I'm not sure any of those things will play out, so if we chose to go down this path we may have just 2-3 years before the world says enough is enough.

2) The "buy us some time plan" - We continue along the current spending pattern but utilize new taxes to offset the costs. This is the harder course to chose (particularly for politicians on both sides of the aisle that have shown no ability to make any hard decisions) because it opens up the "tax and spend" debate. However, this is the only option that can maintain the fiscal stability of the US in the long run.

The new push for health care reform is coming this summer. There will be lots of rhetoric on both sides and most of it will be white noise. The Dems need to get this bill passed in 2009, because the 2010 elections could narrow the margin in the House. The way to pay for this bill will be through a VAT tax and taxes on health benefits. They probably won't be called "taxes" but that is what this will be, a tax on the middle class to deliver health care benefits for all. I don't really have an opinion either way, but I think we have to be honest during the discussion. We can say that "savings" will pay for the program and we can't continue on a path with millions of uninsured Americans.

Unfortunately, all of the forecasts about future health care spending ignore two 800 lb (literally and figuratively) gorillas in the room. The Baby boomers and the babies. It's difficult to characterize an entire generation (particularly when there are 60 year olds still out there kicking my behind in triathlons) but it's safe to say that the numerical and physical size of the boomers might be our undoing. Social security and Medicare are set to get whacked by the coming wave of boomers retiring. We can offer a temporary fix by delaying benefits or extending the retirement age ---- I'll pause for a moment while my mother pulls herself up off the floor ---- but again, no one has the intestinal fortitude to try that in today's political environment. The second wave of pain is much further down the road, but the childhood obesity epidemic is going to put incredible strain on our health care system in 20 to 30 years. I don't have a good answer to that problem but I think revising our school lunch programs would be a good place to start........

Which path will we chose?


Anonymous said...

why not cut spending vs. raise taxes, govt can't afford to spend any more just as i can't afford to pay anymore.

Anonymous said...

With the dorks we have in D. C. you expect a sane train of thought on anything? Look at the stimulus spending. Nobody knows and nobody cares where it is going. At least nobody in either house. That includes Senate, Representative and White.

The Artful Blogger said...

Anonymous 1: I agree, cutting spending would be ideal, but it's not going to happen.

Consider what happens every time Gov. Paterson considers cutting spending - we're peppered with ads, telemarketers, etc. telling us how cutting corrections officers will put murderers in your neighborhood.

Anonymous 2: It's pretty clear that most of the stimulus is going to be less stimulative and more status quo. It is not being used to stimulate hiring, but rather to prevent layoffs. Eventually, in 2010 we'll need stimulus part 2 to maintain these jobs --- it will be interesting to see how that plays out in an election year.

Thanks for the comments.