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A Worse Case Scenario For Deficit Spending - Even If It's Worthwhile

Posted Sep 27 2009 10:29pm
The latest issue of The Economist has a telling article about Britain's need to downsize to a 'leaner and fitter state.' According to this 'Briefing,' persistent deficit spending, lower tax receipts, and 'permanent loss of (economic) capacity means something has got to give. The first sign would be a downgrade by the rating agencies, in turn forcing Britain's borrowing to yield higher interest rates. Since there is little appetite among elected officials to make the leaner and fitter hard choices vs. continuing the welfare state, a tempting way out will be to permit inflation to melt the deficit away. Unfortunately, that'll also melt away the value of everything else, like pensions and savings - and interest rates will only zoom higher.

This may sound familiar to those of us in the U.S., where we have also opened up breathtaking deficit spending, even if it is in the name of the public good. While extreme times call for extreme measures, the amount of debt we're assuming to support our lifestyle is truly remarkable.

And the latest guest to the U.S.' deficit spending banquet? While health care reform is being touted as 'deficit neutral' i.e., not adding to the deficit thanks to a combination of cost controls and taxes, the Disease Management Care Blog isn't too sure about that. While the President's promise sounds good, the DMCB thinks the critics have two good points:

1. Past is Prologue: Washington D.C.'s track record in controlling costs in its Federal healthcare programs to date have been insufficient. The rhetoric around fraud and abuse, electronic health records, comparative effectiveness research and prevention may have some basis in reality, but is any of that really up to the task of countering our appetite for technology and the aging of the Boomers?

2. The Healthcare Bubble: Bubbles occur when too much money is chasing a product or service. The high tech stock boom was an example of irrational exuberance in the private markets, while the housing bubble was at least partially driven by Uncle Sam's policies promoting home ownership. When millions get a relatively complete insurance benefit that continues to insulate them from the real cost of healthcare, they'll use it. Combined with our collective inability to restrain costs, the injection of new money will throw gas on the fire.

So where will this lead? You may think it's only funny money, other people's money or justified money, but the expanding deficit is going to have to be fixed one way or another. While we're pondering this, it may make sense to think long and hard about the worse case scenario. Marc Faber of the widely read Gloom Doom and Boom Report connects the numerous spending dots out to its most wicked end. In this video, he predicts either a) standards of living will precipitiously decline once the current stimulus runs out of steam (around 2018 plus or minus) or b) governments will turn to war as a means of hitting the 'reset' button the financial system, or c) both.

Likely? The DMCB doesn't know. Worth thinking about? Definitely.
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