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Health Care, the Federal Deficit and Federal Debt

By April 12, 2010Commentary

If you have been living in the United States for a few decades, you know that there have been continual warnings that our national finances were heading for a crisis, largely driven by health care and social security programs.  Notwithstanding those warnings, the only thing policymakers have done is add new entitlements and benefits.  The crisis now seems to be upon us.  Although the Administration and Congressional leaders would like to portray the recent health law as reducing the deficit, knowledgeable persons know that it will actually add to spending and consequently the deficit and debt.  A recent perspective in the New England Journal of Medicine discusses health care’s contribution to our financial mess.   (NEJM Perspective)

Some national deficits are cyclical, that is, caused by changes in overall economic performance; and some are structural, that is, they persist despite good economic performance.  The United States has entered a period of long-lasting structural deficits and these structural deficits are the major contributor to the growing national debt.  While economists debate the effects of deficits and debt, the real world is currently showing us some of the negative effects, including the potential difficulty of even issuing more debt when needed.  Greece and California are prominent examples.  At a minimum, total annual interest costs increase, which add to overall federal spending, either causing more of a deficit or crowding out other spending.  As a country’s total debt burden rises, it will almost certainly have to pay a high interest rate on new debt issued, which has the same negative effect.  At some point, potential purchasers of the debt may become so concerned that they simply refuse to buy.  High deficits and debt may also negatively impact economic growth by impinging on private borrowing.

Our debt is already at the point of danger and the current phenomenally high annual deficits are adding to that debt rapidly.  The authors of the perspective list the usual options:  raise taxes or cut spending.  Tax increases likely reduce economic growth.  While there may be strategies that reduce health spending without reducing benefits or number of people covered, generally those are unproven.  The perspective appropriately points out that perhaps we need to find ways to cut spending first before we expand coverage, so that we can see if we really can afford massive subsidies and spending expansions for health care.

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