Subsidies for the World’s Most Expensive Healthcare

Writing a market analysis for Citigroup’s weekly Portfolio Strategist newsletter, Steven Wieting outlines a dire future for America’s government debt. Note that this is far from a partisan magazine, it is a real-world analysis of possible scenarios for investors. An extensive excerpt follows:

§ Markets may still be overestimating the short-term vulnerability of the U.S. economy amid a strengthening and self-sustaining cyclical recovery. At the same time, the risks to U.S. economic performance in the long term have actually never seemed more dire.

§ Far from hoarding labor (unlike others), the U.S. has just endured the deepest two year decline in employment of the post war period. Signs abound that production, employment and investment declines have been unnecessarily severe, an overshoot. Friday’s data surprised with three consecutive months of private employment gains, with some confirmation in the separate survey of households.

§ But few had ever contemplated entering a well-advertised period of demographic weakening and higher dependency levels with a U.S. budget deficit so large as a starting condition.

§ The structural budget deficit looks potentially unmanageable even five years from now, when employment is assumed to be “full” and the financial supports of the recent crisis are paid back as fully as they ever will be.

§ Higher taxes have always seemed necessary to cover elder-care entitlements in the period ahead. But as a start, taxes are being raised instead to cover expanding entitlements further and can’t be used again for initial deficit reduction or offsets to future large increases in spending programs in place.

§ With the presumed passage of expanded subsidized healthcare coverage for nearly all in need, U.S. consumers, taxpayers and employers will have to buy more of the same healthcare goods and services sourced at the highest observable cost per unit in the world.

Unusual Digression in Short and Long View

On visits to clients across different parts of the world in recent weeks, we have continued to sense at least a worrying complacency with the long-term outlook for the U.S., against residual fears that the economy is incapable of cyclical recovery. In essence, many investors seem to overestimate cyclical vulnerability, while underestimating structural economic risks for the U.S. over the long run, in our view.

Far from hoarding labor (unlike others), the U.S. has just endured the deepest two year decline in employment of the post war period. Signs abound that production, employment and investment declines have been unnecessarily severe, an overshoot.

[…]

At the same time, the risks to U.S. economic performance in the long-term have actually never seemed more dire.

A demographic bulge in the dependency ratio has always loomed beginning in the early- to mid 2010s. That “bulge” worsens gradually for the following 25 years.

Few had ever contemplated entering this period with a U.S. budget deficit so large as a starting condition. This structural budget deficit looks potentially unmanageable even five years from now, when employment is assumed to be “full” and the financial supports of the recent crisis are paid back as fully as they ever will be.

Higher taxes have always seemed necessary to cover elder-care entitlements in the period ahead. But as a start, taxes are now being raised instead to cover expanding entitlements further and can’t be used again for initial deficit reduction or offsets to future large increases in spending programs already in place.

Following the recent political debate, many Americans might have come away with the notion that health insurance companies “charge too much” for healthcare. Perhaps the insurers need to hire their own cheaper doctors and build their own cheaper hospitals to compete with the existing supply of them. Assuming otherwise, they will still need to pay the same amounts for hospital stays, procedures and medicines as before, at the highest observable cost per unit in the world. But now, with the presumed passage of expanded subsidized coverage for nearly all in need, U.S. consumers, taxpayers and employers will have to buy more of those same goods and services, sourced from the same supply base.

Aside from small experimental steps to develop competitive exchanges for individual insurance coverage, never before have we seen a U.S. policy solution seem so detached from the underlying problem it purports to address. Americans want more healthcare, and will need more as the population ages. But the existing system fails in almost every way to match economic benefits with costs, obscuring them instead.

And while the latest reform effort purports deficit reduction over ten years, it does so on roughly six years of expenditures and 10 years of tax increases. More importantly, medical entitlements have never been “overpriced” into budget outlooks allowing for positive cost surprises (see Figure 11). The healthcare overhaul achieves the bulk of its purported spending cuts through limiting Medicare payments to doctors, hospitals and nursing homes, cuts that Congress has failed to pass through repeatedly since 2003, instead opting for more spending. Private insurers, meanwhile, would see some ostensible limits to their pricing, but generally would need to expand coverage, and purchases of healthcare services and goods.

In two places in the developing and developed world, laypeople mentioned to us that healthcare in the U.S. would now properly come for “free” for those unable to pay for it. If only that was true. Instead, future tax payers will have to come to grips with the costs of a system that for now is neither disciplined by competitive market forces nor rationed like other public welfare programs.

But if not in healthcare, rationing will take place in other places. Public education outlays for the future taxpayers have reportedly been a target of near-term budget constraints. While never free from waste, these are human resource investments that contribute to the future economic output. There are investments in the individuals who will carry the larger future tax burdens of the dependency bulge of coming decades.

We have been concerned for some time that a greater, unsustainable share of future entitlement outlays will end up deficit financed, with costs simply put off further into the future. At least that may be attempted. But among other concerns, lenders to the U.S. may feel less than certain about that stream of future income and output if incentives are so skewed against those who will need to provide it.

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