Can the Nation Afford It? - Part II

There are two sides to everything.  Our previous discussion, that compared the US debtor status with other countries, showed that our GDP is nearly a quarter of the world's, and showed our status in numbers with a few less zeroes with the assumption that trillions are not numbers we throw around all that often.
Our example showed a woman earning $134,540 per year, who owes $125,000 mortgage and $1871 on her car.  Doesn't sound so bad, does it?
Sadly, there is no perfect analogy.  For example

• The woman in our example will own her home outright 30 years from now, after paying her $125,000 mortgage, and that home will likely appreciate in value over that time.  US National Debt will do no such thing.  It is paying for current programs.  Thirty years from now, many of us will be dead, and that debt will continue to be paid by our children.  Therefore, when considering a policy that increases our debt, the first consideration should be whether it is important enough that we encumber our children with its cost.  For example, health care costs are 16% of the total budget, and that cost is rising at 12% per year.  At that rate, in 10 years, health care costs will be 50% of the US budget. This is an unacceptable situation that must be addressed in a way that cuts cost acceleration significantly, or it will bankrupt the next generation.
• Lowering the level of national debt is a good thing, but it is the goal of no nation to completely pay off the national debt, as was the goal of the woman in our example to pay off her mortgage.  According to Asia Times, even thrify China has $407.5 billion (3.26 trillion yuan) national debt as of 2005, approximately 18% of its GDP.  Therefore, to quote a figure that each US citizen owes just under $40,000 per citizen is incorrect.  Cutting the debt by 25% would be a more reasonable goal, which would require an average of $10,000 in tax increase per citizen - in addition to balancing the budget.  Clearly, expentidures must be cut and taxes, increased.
• The primary issue is not the deficit per se; rather it is the direction and trajectory of the deficit.  Right now, it's going up - fast.  That's very bad.  Piling on debt when revenue is flat is a terrible idea.  However, we are just coming out of a recession.  When the unemployment situation improves, revenues will increase.  No increase of revenue, however, will address the current rise in the health care portion of the budget.  That must be addressed through cost containment.

Reasonable people disagree about the particulars in the health care debate.  One thing, however, is certain.  The beneficiaries of non-action are health insurers, who are, by the way, the largest contributors to Congress (who have an excellent lifetime health package).  We must be vigilant that the effect of such lobbying not veil the critical nature of taking immediate, effective and long-term steps to stem the rise of health care costs in this country.  To take no action is to assure bankruptcy for the next generation.

Straight Talk About Debt

No issue is more politicized than deficit spending.  Blame abounds, but little insight is given into the components of our deficit, and what reasonable action must be taken.
For a history of US deficit spending, click here.  For an estimate of our current national debt, click here.

Facts

The stimulus package comprises approximately 10% of our current deficit. 
The majority of the deficit spending is comprised of:

1. Unfunded liabilities from tax cuts made by Jobs and Growth Tax Relief Reconciliation Act of 2003.  When enacted, the Congressional Budget Office estimated that the tax cuts would increase budget deficits by $340 billion by 2008.  That effect has been exacerbated by the just ended recession (see 3. below).
2. Unfunded liabilities from Medicare Drug Program.  When enacted, Medicare chief Mark B. McClellan said the drug package would cost $1.2 trillion between 2006 and 2015.
3. The opportunity cost in GDP lost because of the recent recession which began in 2008.  Generally, annualized GDP grows just under 3%.  For the 18 months ended June 30, 2009, annualized GDP contracted just under 2% - or 4.6% less than average.   From the last quarter in 2008 to the second quarter of 2009, our $12 trillion economy shrank an aggregate of nearly $400 billion - representing a huge loss of tax revenue, loss of employment, etc.,

No credible economist would argue that the stimulus package was unnecessary.  It was begun by necessity in the previous administration and continued into the current one.  It is not the source of our economic problems, and allegations to the contrary are clearly false.

Growth of health care costs is unsustainable.

Left unchecked, growth in health care costs, currently about 17% of our GDP, will bankrupt the US.  That is not overstated to create alarm.  It is a fact.
Those who take the position that we cannot afford to pass comprehensive health care reform are wrong. 
Health care costs are increasing 6.2% per year.  At that rate, in 25 years health care cost will be almost 30% of GDP.  In 50 years, it will be almost 50%. 
It's the biggest problem we have, and we must solve it in order to address deficit spending in any meaningful way. 
To counteract any effort to address this problem which may threaten their profits,

• $3.8 billion has been spent by the insurance and finance lobbyists and
• $3.69 billion, by health industry lobbyists,

according to Open Secrets, a non-partisan group referenced recently in an article by the Wall St. Journal.  No industries have contributed more, by the way.

Medicare first.

Only one group represents more clout than the two lobby groups discussed above.  Retired persons.  Grey panthers.  AARP.  Lots of boomers with time to spare, and raised during a time where the promise of Medicare (enacted in 1965) was sacred.  Prior to the aforementioned unfunded drug program in 2006,

• the number of Medicare recipients increased 2 times - from 20.4 million to 42.6 million 
• the economy grew 12 times - from $1 trillion to $12 trillion
• Medicare spending grew 47 times - from $7 billion to $339 billion

Big problem.  Anyone can see that costs are rising too fast.  So where should we start?

1. Increasing information technology for patients
2. Containing drug costs via use of generics
3. Limiting malpractice judgements (thereby limiting doctor's insurance premiums)
4. Opening group insurance rates to small business
5. Providing equal tax benefits to private insurance as employer-provided insurance
6. Lowering the deductible and raising the contribution limits on Health Savings Accounts

These policies would assure that the goal of cost containment would be foremost in the minds of legislators.  If we don't get this right, we go broke. 
It's as simple as that.

A Woman's World Economic View

I. The United States
You know we've been in a recession. If you're employed, you're probably nervous about keeping your job. And if you're unemployed, you know we've been in recession better than I could ever tell you.

It's up to the National Bureau of Economic Research to provide the official beginning and ending dates for recessions, and if you're interested in how they do it, you can read about it here. For the rest of us, we saw a banking crisis start late last year, and while we may not have known the details of how it happened, we certainly knew why.

We saw every Jane, Jean and Judy buying houses they couldn't afford, getting a mortgage based on her ability to fog a mirror, and saw real estate prices zoom upward - like the Internet stock prices did in the late 1990's. A familiar pattern, with a familiar "pop" end the end of the bubble, accompanied by falling housing prices.

Then we really saw the force of this nasty recession.

Unlike the past, though, it is not the US that is leading the world out of recession. We're mired in debt and have failed to pass even one piece of financial reform legislation more than a year after causing a worldwide economic downturn. Although we appear to have stopped our economy from shrinking, we expect anemic growth at best for the next year or so.

II. Our Place in the World Economy

From the end of WWII through the remainder twentieth century, the US was the world's economic powerhouse. A significant reason for that was attributable to "good old Yankee ingenuity." During the war, we focused our best and brightest toward the war effort. Because military technology at that time had civilian application, our best minds transitioned easily from the war effort to consumer technology.

In the latter part of the 1900s, the US voted with our pocketbooks to stop looking for the union label and outsourced much of our manufacturing to countries who could produce our goods with lower employment costs. As a result, we became less a manufacturer and more a service provider to the world. Our techies were golden, and Wal-Mart, our merchant.

We imported much more than we exported, and became a debtor nation to our manufacturers, especially China. Thus, a great wealth transfer took place in the so-called "third world," where manufacturing jobs expanded feverishly. The Chinese built an enormous middle class from their export business.

Now, they finance about 25% of our national debt, which is the sum of all the deficits, or overspending we have accumulated every year - plus interest. For a look at our historic debt levels, read my July 15 article.

III. Popular Misconception

There is no doubt that our deficit is high. Without mitigating the seriousness of that situation, though, understanding China's reliance on the US as a major buyer of their manufactured goods is critically important as we evaluate our status as a debtor nation. Their population has accepted Communist rule with an unspoken financial contract that it expects to reap the benefits of newly acquired wealth. Should China stop buying our debt, which continues to be the highest quality in the world, it will also assist in further lessening the value of our dollar and likely fuel an inflationary fall into another recession.

Smart sellers don't bankrupt their main customers, and China is not stupid.

Further, while anyone can see that both China and India have been growing rapidly, we are not on the verge of losing our position as the primary financial powerhouse in the world. Much has been made of the meager savings rate in the States as compared with the thrifty Chinese. Upon closer look, however, it's apparent that the Chinese are thrifty largely because they cannot rely on their government to care for them. For example, the Chinese social security system currently has $94 per retiree, according to Steven Roach, head of Asian Operations at Morgan Stanley. Yes, our system also has problems, as the Social Security trust fund remains an IOU by Congress, but ours does have a long, unbroken history of payment. The Chinese are accustomed to caring for themselves during disasters, both natural and financial, and therefore tend to put more aside.

Last, while we attempt to once again define ourselves as the technological leader in such growth industries as "green technology," we have, without question, both the best institutions of higher learning that are necessary for cutting edge research and development, and an open door to the best minds in the world.

Having taught math-based analysis courses at UCLA, I can attest to the great difficulty I had during roll call in our first sessions. These unpronounceable names were from every corner of the world, and the university was delighted to have them.

Once again, a combination of our open door to great world minds, with Silicon Valley innovation may be our economic savior, moving from high technology to green energy, and selling it to the world.

IV. Future Course

Once we have economic stability and a health care policy that will not bankrupt our country, our next priority must be to get our financial house in order. Let's look what high debt does to the country by personalizing it a bit. Let's say you earn $60,000 per year. After taxes, you net $4,000 per month. Your mortgage payment is $1,500 per month, you have a second mortgage of $500 for major home repairs, your car payment is $600, and you have eight credit cards on which you pay an aggregate monthly payment of $850. That leaves you only $550 every month for food, clothes, medical, utilities, gasoline and car repairs, movies, and all other incidental expenses. You're in trouble. You're probably increasing your credit card debt every month, paying for necessities you couldn't afford after paying your debt. So, your credit card debt is growing, and you're barely hanging on.

Magnify that situation, and you have our Federal government. Yes, we had to pass the stimulus package to save ourselves from financial ruin. Yes, we have to address the unsustainably high cost of health care. But once that's done, we must cut expenses and pay down our debt, just like the person in our example, or risk the future of our economy.

We must also acknowledge that, within the next century, the US will be one of the world financial powerhouses, but not the only one. If China learns to cooperate with the rule of international trade, and if India streamlines its impossibly difficult tangle of red tape, than a less indebted US will share its position with them.

V. What We Do

What we do matters. We shopped at Wal-Mart. By doing so, we exported manufacturing jobs.

Now, we must demand that our deficits be reduced and focus on educating our young people to work in a much more competitive and complex world.

Education has always been a women's issue. We know that the answer to education is not primarily money. It's a contract between teachers, parents and children that excellence is expected, and failure is failure on a world order.

What we do matters.

Health Care Reform Meets Financial Reform

I. Health Care Reform - and Insurance

In response to President Obama's Health Care Reform address this week to a joint session of Congress, the Cato Institute recommended that, in order to help achieve the goal of cost control in comprehensive health care, "(p)eople should be allowed to purchase health insurance across state lines," noting that "(o)ne study estimated that that adjustment alone could cover 17 million uninsured Americans without costing taxpayers a dime." http://www.cato-at-liberty.org/2009/09/08/mr-president-here-is-our-answer/

Unfortunately, the insurance industry is regulated on a State level, so such across-state-lines purchase of health insurance is currently not possible.

II. Financial Reform - and Insurance

As I mentioned recently in the first of a four part Financial Reform legislative review series, http://womensfinancialplanning.blogspot.com/2009/07/obama-administration-financial.html State regulation of insurance companies makes regulatory oversight very difficult. That difficulty in regulating this industry contributed in large part to the financial meltdown that began last year, and continues today.

III. Health Care Reform Meets Financial Reform - with Insurance

Insurance regulation is again brought to the forefront as we discuss means to achieving bi-partisan support for the adoption of comprehensive health care reform in the United States, just as it was when financial regulation was being discussed. And, as this reemerges, we find Morgan Stanley CEO John Mack, who guided that institution through the recent financial meltdown, saying:

"I'm somewhat disappointed that we've lost a little of the steam about getting financial reform. We do need system-risk management." http://www.cnbc.com/id/32799393 Risk management, by the way, is just another way of saying 'insurance.'

These are complex times. There are complex domestic issues that require consideration on many fronts.

IV. Can We Do More Than One Thing At a Time?

It is not appropriate to say, "Since we've avoided the seizing up of the financial markets, now we can concentrate on health care." We cannot discuss the health care without discussing the insurance industry - and a large part of financial meltdown involved abuses from industry.

To date, no financial regulation reform has passed. Every US woman and man has a stake in this. It was with $180 billion of your money that insurance giant American International Group ("AIG") was bailed out, after having issued innumerable credit default swaps. What were those? They were unregulated promises by AIG to guarantee mortgage payments - for which they had no way of paying when the mortgages defaulted. In other words, AIG (and many others) collected fees for promises they made, but could not keep.

Thus, the insurance industry is at the heart of both the financial crisis and the health care debate. We must accept that both are critical components of our economic survival.

I have heard no compelling argument for keeping the insurance industry regulated at the State level. That is too complex from a regulatory perspective, and non-competitive from a health insurance perspective. Both sides of the political aisle seem to agree on that.

V. What Action Can You Take?

First, become acquainted with the issues. The administration's financial reform proposal is referenced and discussed at the link provided above in Section II. Whatever your opinion with respect to the version of health care legislation you support, it is likely, unless you own or lobby for an insurance company, that you support the free market competition that will result from the ability to purchase health insurance across state lines.

If you refer to Open Secrets, a non-partisan group referenced recently in an article by the Wall St. Journal http://www.opensecrets.org/lobby/top.php?indexType=c you will see that the two top industries spending the highest number of lobbying dollars to influence legislation are:

• Finance, Insurance & Real Estate $3.7 billion
• Health $3.55 billion

Remember that your Congressional representatives work for you, not lobbyists, and that it is you who pays for their health insurance, which is likely far superior to yours. To voice your opinion on Federal regulation of the insurance industry, here is a list of your representatives, with their email addresses http://www.visi.com/juan/congress/

As always, your comments and suggestions are most welcome.