The ice has broken, and after months of freeze-up, the U.S. Congress is suddenly hurtling toward enactment of a colossal health-care reform.
The vote count remains uncertain. Things could still go wrong for Democrats. But the probabilities are strong that Barack Obama will be signing a historic bill sometime next week.
It’s a big win for the President. It’s a huge expense for America. What will it mean for the rest of the world? Very likely: much more U.S. borrowing over the decade ahead, a lower dollar and higher U.S. interest rates.
Health-reform supporters are relying heavily on a report from the Congressional Budget Office that estimates that reform will actually reduce the cumulative U.S. budget deficit slightly over the next 10 years. Well maybe. But the savings in the bill are highly theoretical, the taxes in the bill will be controversial and the expansion of subsidies and other benefits is a hard fact.
The Washington Post reported Friday: “As much as the 25-page ‘score’ of the legislation was treated as holy writ in Washington — Democrats eagerly flagged its conclusion that the package they aim to pass this weekend would cut the deficit by $138-billion over the coming decade — the reality is considerably messier. Budget experts generally have high praise for the work of CBO analysts, the non-ideological technocrats who crunch the numbers to estimate the fiscal impact of legislation. But their work is often more art than science, and although the forecasts that accompany legislation are always filled with uncertainty, this one contains more than most.”
Healthcare projections are notoriously difficult. As the American Enterprise Institute’s Steve Hayward has pointed out, similar estimates were done at the creation of the U.S. Medicare program in 1965: “Government actuaries predicted that the cost of a day’s hospital stay by 1985 would be $155 and that the hospital insurance portion of Medicare would cost $9-billion by 1990. The actual average cost of a hospital day by 1985 was over $600; instead of $9-billion, the hospital-insurance program cost $63 billion in 1990.”
Put another way, the true cost of the hospital-insurance program was 700% of what actuaries had predicted. Adjusting for inflation, the real cost turned out to be almost double the forecasted estimate.
As is, Obama’s plans will raise America’s debt level to 90% of GDP by 2020. If CBO is right, healthcare reform should not alter that big number very much. But what if CBO is wrong? Not nearly as wrong as its predecessors in the 1960s, but say 20% wrong?
In that case, by the year 2019, the Obama plan will be costing Washington five times as much as the Afghanistan war is costing today — and the U.S. will be headed toward a debt-GDP ratio closer to 100% than 90%.
The last time the United States got that in debt was in 1945, at the end of the Second World War. But back then, the way out of debt was obvious: As soon as the war ended, wartime spending would drop. But in 2020, the only way forward for the United States will be the way found by Canada in the 1990s, when Canada’s federal debt neared 100%.
That way is to allow the currency to depreciate (the Canadian dollar dropped from 85¢ U.S. in 1990 to an ultimate low of 63¢). Currency depreciation triggers an export boom, while suppressing imports. Government raises taxes and cuts services. The country earns more, consumes less and devotes more of national income to debt service.
To compensate for the money they’ll lose from the decline in the U.S. dollar, American lenders will demand an interest-rate premium. So (other things being equal) U.S. dollar-denominated interest rates can be expected to rise over the decade ahead. Higher rates will in turn further suppress domestic consumption.
Everything adds up to a tough decade for Americans, their equivalent of Canada’s tough decade in the 1990s.
In Canada, tough economic times translated into political turbulence, as every region of the country became convinced it was being ripped off by the others. Brian Mulroney’s Progressive Conservative party imploded, Quebec held a second referendum on independence, Albertans talked of building “fire walls” against the rest of Confederation, Ontarians elected governments of three different parties in a single decade (something they had not done since the Depression) and the governing Liberals held onto power in Ottawa with under 40% of votes cast.
The mood in the recession-wracked United States is already tense enough. What happens, though, when recovery comes — and incomes continue to be squeezed? When Americans return to work — only to discover that they are working to repay the nation’s debts, not to improve their own personal standard of living?
Look for an even tenser decade ahead, made tenser still by any added costs of Barack Obama’s vast new social welfare program.
Originally published in the National Post.
James Cody // Mar 20, 2010 at 2:34 pm
“Not nearly as wrong as its predecessors in the 1960s, but say 20% wrong?”
And what if it’s 20% wrong in the other direction? Remember, Part D has been much cheaper than originally projected. The savings of this legislation could just as easily end up being 20% greater. And also remember, the CBO was not around in 1965. Why the heck would we judge the likelihood of the estimates being right based on processes and methodologies from almost 50 years ago, instead of the process and methodology that is in place now and has been right (or actually over-estimating costs as of recently)?
Or what if not acting results in costs being 20% higher than projected? We already know that health care costs — not just government health care costs, but all health care costs — pose grave problems for this country in the future. But what if the problems are even 20% worst than projected if we do nothing?
The point is, all you’ve done is assume the worst case scenario and then say we can’t act because that can take place. But if all we do is play a game of speculation, then the arguments are just as strong for acting as not acting.
Moreover, we all know that if the CBO said this thing would increase the deficit by $138 billion, you would be waiving that around and not discussing weaknesses of CBO scoring. You know it, so don’t deny it. There is a reason why we have an official scorekeeper that we rely on. Because whoever doesn’t like the score they get can just make up speculative guesses of the worst possible way in which the CBO could be wrong — which is all that you have done — and then say so we shouldn’t act. But if we do that, we NEVER act, on nothing. Not on supply side tax cuts, fiscal stimulus, health care reform, welfare reform, etc. The only thing we can do is make our best guess of what will happen (which basically is what the CBO does) and then act accordingly.
One last thing. This legislation is a reformer’s dream, including pilot programs for just about every reform idea out there (bungling, hospital incentives, Medicare commission, excise tax (which has not been pushed to god knows when, but to 2018), selling insurance across state lines (yes, contrary to the extraordinary ignorance of many conservatives, it’s in there), etc). As I’ve said, health care costs pose a grave danger to this country’s future. But this bill is our best shot at getting reforms out there that can bend the cost curve. Yes, I would have preferred doing the cost cutting and reforms before adding a new entitlement program, and in fact that was the compromise I hoped would happen after the Brown victory, but the political reality is that either this bill passes with its cuts and reforms, or we don’t do this again for at least 10-15 years and we lose more than a decade of reforms taking root.
ltoro1 // Mar 20, 2010 at 7:26 pm
Cody, was your reference to “bungling” a Freudian slip?
parvus // Mar 20, 2010 at 9:22 pm
David,
You’re being specious here. The Canadian dollar dropped to its 62-cent low in 2002, well after Canada had eliminated deficits (1998) and had started reducing its overall debts. And interest rates were considerably higher in Canada than the U.S. through most of the 1990s, precisely to assuage foreign debtholders. It’s hard to see in this any inflating away of debt. Canada didn’t devalue its currency; FX traders did, and thereby made Canadian exports more competitive. I’m sure the traders, armed with the best information that Bloomberg could provide, had their reasons …
On the other hand, when Nixon renounced Bretton Woods and let gold float …
Counting the True Cost of Obamacare | FrumForum // Mar 21, 2010 at 7:56 am
[...] colleague and editor David Frum also writes on the CBO estimates in his latest National Post column, and he makes a good point about such estimates being historically [...]
sinz54 // Mar 21, 2010 at 10:15 am
James Cody:
No it hasn’t.
It is now projected to cost over $700 billion in its first ten years of operation, nearly triple what Bush had originally said it would cost.
The reason? Twice as many people signed up for it as originally expected. Bush has estimated 11 million people would sign up for D; instead it turned out to be 24 million.
That’s the problem. Once an entitlement is enacted, lots of people who never thought about asking their elected representatives for such an entitlement see that it’s there now, “free” money, and they jump into it.