Wednesday, July 27, 2011

Debt ceiling pathology

It isn't much of an advertisement for Congress. Checks and balances has turned into just checks - in the sense both of blockages and endless writing of more checks.

And it is important to remember that interest rates on the debt are currently eye-wateringly low, near zero at the front end of the curve. If rates go back to their historical averages, then the hit could easily be $200 bn a year or more. This debate is actually happening in an unusually benign bond market with unusually low payments on the stock of debt.

Discretionary spending on things like the FAA or food safety or even the usual pork is just a sideshow, of course. Everything really comes down to medicare and medicaid. If you don't solve those, arithmetically you can't solve the wider budget problem.

The US would actually be in good shape if it could only control the growth rate of healthcare spending. Some of the growth in medical spending is demographic, because of more elderly people in the population. But more is just waste. And neither party has a good plan to deal with it. The Republican Cantor plan caps government spending on Medicare...but there is no sign that private insurance companies have been successful at containing costs. The pilot plans and independent board in the Democratic plan are toothless.

It does mean, though, that shouting over the debt limit and the size of government distracts from the real issue. How can medical cost growth be contained? Solve that and the rest looks after itself. The drama on the debt limit just distracts from the need to make decisions on the longer-term things that matter.

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