We’re Not Greece (Yet)
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The European Debt crisis has dealt a devastating blow to the welfare state ambitions of the American left. Americans view the debt crisis in Europe as the logical culmination of years of unsustainable fiscal commitments and wonder whether our government has made similarly unaffordable promises. As A.B. Stoddard of The Hill writes, Americans view the crisis as “a fiscal oil spill, waiting to see where it will spread first and when it will make landfall on our shores.” The Obama Administration may feel lucky that it signed health care reform into law before the Greek crisis intensified, but the mood of the country may be sufficiently circumspect about new obligations that repeal cannot be ruled out.
Academics have found that the more comprehensive a country’s social safety net, the less the economy’s performance matters to voters. Public health care and income support lessens the blow from economic downturns and eases economic insecurity. But such expenditures also desensitize voters to the need for the private sector productivity growth that generates the income necessary to pay for these obligations. Voters become apathetic, except when politicians threaten to scale back on benefits. This ossifies the welfare state and introduces structural rigidities.
Higher unemployment benefits lengthen the duration of periods of unemployment. Higher unemployment rates tend to be found in countries with “overly generous unemployment benefits and stringent employment protection regulations.” The more attractive the state makes it not to work, the less inclined a person is to re-enter the workforce in anything other than an ideal situation. At the same time, restrictions on employers’ ability to terminate workers reduce new job creation. The simultaneous reduction in the supply of and demand for labor results in persistently high unemployment, lost productivity, and lower national income, which increases the relative economic burden of the welfare state.
The Obama Administration’s stimulus bill delivered European levels of social welfare spending to America. Unemployment insurance was extended to a maximum of 79 weeks (at a 2009 cost of $22 billion. (It's actually 99 weeks in states with the highest unemployment rates.) The government spent $23.5 billion to cover the health care insurance of the recently unemployed. Food stamp spending was increased for the year by $20 billion. Congress is now planning to extend the temporary health insurance spending for another year at a cost of $29 billion. Beyond stimulus, the Obama Administration’s new health care bill is expected to cost more than $100 billion in 2015 and double in cost in just three years. It is also worth noting that the blank check the Obama Administration has written for Fannie Mae and Freddie Mac is not only filling the hole created by hundreds of billions of dollars of past losses, but also providing a large subsidy for new home mortgages.
The tea party movement came into being well before Greece first experienced refunding difficulties. However, the crisis in Greece has the potential to aid the movement by confirming the suspicions of those voters uncertain about the sustainability of the Obama Administration’s fiscal path. The current deficit looks less like a mess to be cleaned up by future generations and more like a direct threat to today’s prosperity.
Paul Krugman recognizes the psychological impact the sovereign debt crisis is having on American politics and has responded by explaining that what’s occurring in Greece has no implications for U.S. fiscal policy. Krugman suggests that the plight of Greece is being exploited by those who’d like to “dismantle Social Security,” and insists that health care costs are the source of our fiscal challenges and that any revenue shortfall could be plugged through higher taxes on the “rich.”
This prompts an interesting question: if medical cost containment is the answer to our problems, why hasn’t it worked for those countries currently choking to death on public expenditures? The rationing of access to medical technology has not placed Greece, Ireland, Portugal, the United Kingdom or other European Union nations on sustainable fiscal trajectories, but yet we're supposed to believe that emulating these countries’ approach to health care delivery is what’s required to avert their fate?
The table below shows the increase in net sovereign debt for 7 eurozone countries, the U.S., U.K., and Canada from 2008 to 2011. The rise in net debt is smallest for Canada, whose net debt is expected to rise by “only” 13.28 % of GDP over the three year period and highest for Ireland, whose debt is expected to rise by 37.58% of GDP. When controlling for existing debt levels, the smallest increase is Italy, whose debt-to-GDP ratio will rise by only 15.4%, while the debt-to-GDP ratio of Ireland will more than quadruple (rise by 330%) over this period.
The charts below compare these countries’ change in net debt to health care expenditures as a share of GDP. Interestingly, the change in net debt is inversely related to health spending. Countries that spend less on health care as a share of national income have seen their debt levels increase more, on average. While stabilizing or reducing the health care-to-GDP ratio will dramatically improve the long-run fiscal picture, it will do nothing to immunize the U.S. from a debt crisis in the near term. Greece spends about 40% less than the U.S. on health care as a share of national income, while Ireland spends only half as much. Moreover, by increasing government obligations without cost containment, the Obama Administration’s new health care law makes a fiscal crisis more likely in the near term in any event.
Responding to the crisis of public expenditures by invoking health care cost containment is a non sequitor. As the International Monetary Fund (IMF) explains in its review of U.S. public finances, “aging and health related spending are not the key drivers of this debt build-up.” Of course they’re not. The source of the debt build-up is nearly $1 trillion committed to stimulus, the $450 billion omnibus appropriations bill, and more than $400 billion committed to Fannie Mae and Freddie Mac in addition to falling revenue from the recession. Health care inflation – slowing the rate of increase in future spending – is a long-run issue. The potential debt crisis caused by the government spending explosion is a near-term problem. It is dishonest to conflate the two, as the IMF suggests:
It has been suggested that curbing the future growth rate of health care costs and implementing readily available policy options to reduce future net social security expenditures would relieve this tension…it would be too optimistic to assume that solely relying on actions to cut future health and aging-related expenditures would be enough to avert the potentially negative implications of the future fiscal path...
In recent weeks, the value of the U.S. dollar has increased and long-term interest rates have declined. If some people wish to characterize this as a vote of confidence in the dollar rather than the natural result of funds flowing out of Europe, so be it. But being “less bad” than the alternatives can only support debt markets for so long. The reckoning will come.