Bernanke Warns About Fiscal Crisis

Fed Chairman Ben Bernanke warned that the grim fiscal outlook threatens the future of the American economy. The problem is simple: spending obligations are far, far, far in excess of expected revenues for the next several decades. Economic growth is extremely unlikely to solve the problem. In the second link the GAO estimates that economic growth has to be in the double digits to solve the problem as they look now.

However, I’d argue that such a view is overly optimistic. Why? Because typically estimates for government programs like the Prescription Drug Program (PDP) have historically been under-estimates. That is, the $9 trillion that the PDP is estimated to cost is probably too low. After all, I doubt most estimates successfully factored in the effect of the program (a subsidy) will have on the price of prescription drugs. This kind of simultaneity problem in modelling is a tough nut to crack.

And how large is this burden? The burden that we are currently facing (using the GAO estimates) break down as follows:

  • Per Person: $156,000
  • Per Worker: $375,000
  • Per Household: $411,000

And keep in mind this isn’t simply the tax burden, but the burden of the short fall alone. That is, it will have to be added on to the estimated future tax burdens. In short, current taxes are too low given current spending obligations.

Bernanke cautioned that supporters of low taxes must ensure that spending is “kept low as well,” while backers of “more- generous benefits payments” must recognize that higher taxes may have “adverse” consequences for the economy.

“Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve and appropriate balance of spending and revenues in the long run,” Bernanke said. He added that the “general” view is that tax cuts “don’t pay for themselves.”

What is going to have to happen is some combination of the following:

  1. current spending obligations will have to be reduced,
  2. expected tax revenues will have to be raised (i.e. raise taxes).

“If early and meaningful action is not taken, the U.S. economy could be seriously weakened,” Bernanke told the Senate Budget Committee.

My guess is nothing will happen and the economy will weaken.

FILED UNDER: Economics and Business,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. ken says:

    First, there is no crisis with Social Security. It is perfectly sound and fully funded for the next thirty years. To cry wolf about what happens after that is beyond stupid. No one can predict that far out.

    Second, medical needs are going to be exactly the same regardless of how they are funded and paid for. Even if you eliminate Medicare that is not going to eliminate the need for hip replacements, heart bypass surgery, or kidney dialysis for older Americans.

    The only choice we have is to pay for medical care or to deny medical care. There is no middle ground on this.

    If we choose to pay for medical care the most efficient cost effective manner to pay for it is with a universal single payer health plan.

    We can easily afford doing this. The amount of money being wasted right now is at least half of what is spent on medical care in this country. A single payer scheme can eliminate that waste, save money, and provide coverage to everyone.

  2. Steve Verdon says:

    And what about the pony too ken, you forgot the pony.

  3. ken says:

    Steve, exactly how are you going to reduce the need for medical care?

    Reducing benefits won’t do it. The needed care will just increasingly not be given. The need is still there whether it is taken care of or not.

    Or are you just blinded by your ideology? Do you really think that medical care is a free market kind of thing subject to the same market incentives as department store shopping?

  4. Dave Schuler says:

    As has been pointed out above the problem we’re facing isn’t caused by Social Security: whatever problems there are with the Social Security system can be corrected by tweaking (SSRA inter alia). The real problem is Medicare.

    IMO the current push for universal coverage from the Left Blogosphere is grasping the wrong end of the stick. Universal coverage would be a lot easier to achieve and more affordable if healthcare weren’t so darned expensive. Tackling universal coverage is treating the symptoms rather than the disease.

    Most analyses concentrate on excess demand but I think that’s largely a canard or, at most, that true excess demand is only one of several factors driving costs up.

    I’m going to toss out a number of assertions without proofs now. I’ve run across all of these things at one time or another but I’m too bone-idle to dredge them up now. First, revenues in healthcare have been rising faster than the non-healthcare rate of inflation for more than 40 years (a lot of the most serious jumps coincidentally took place in the 10 years following the enactment of Medicare). Now there’s a premium built into the system (unless, of course, you can talk hospitals and physicians into taking a pay cut). Second, we’ve graduated about the same number of docs annually since 1980 (and subsidize the heck out of the education of those who do). If we weren’t subsidizing medical education we’d be graduating about half as many. That subsidy, too, builds costs into health care. We balance that off a little by importing the heck out of physicians (which I oppose on moral grounds).

    Third, outputs in healthcare per input have actually been falling for some time practically however you measure the outputs. Milton Friedman commented on that one. This is partially due to insurance companies but not entirely. It’s mostly due to the bureaucratization of healthcare which itself has a number of causes of which government involvement in healthcare is one. This isn’t just true in the United States. It’s also true in the UK, France, and Germany.

    Fourth, about 60% of all healthcare money comes from the government and a heckuva lot of it is spent on end-of-life treatment. Is this more or less because it’s being subsidized? The answer is important.

    Fifth, we’re subsidizing pharmaceutical development like crazy in a whole host of ways. Advocates for our present healthcare system like to point to the remarkable advances made by pharmaceutical companies without seeming to recognize that those advancements are demonstrably made at least partially as a consequence of the over-investment in pharmaceutical companies i.e investment greater than the market would produce without subsidies.

    My point is threefold: healthcare costs are high because of government involvement, healthcare segment salaries are high because of government involvement, and creatures of the government have no business complaining when the government bites back.

    IMO the solution that should be put forward is preserving in principle the prerogatives (and paychecks) of medical doctors in exchange for a major reform in drug prescription rules that would allow a wider segment of pharmaceuticals to be prescribed by non-MD’s or sold over the counter. That’s the general shape, anyway.

  5. Steven Plunk says:

    Injecting more government into health care will worsen the problem. How can you expect government to be a responsible provider when they can’t say no to the demands of users or taxpayers. They will continue the pattern of borrowing money and letting future generations deal with the bills. That’s how we got where we are at with Social Security.

    If we continue the decision disconnect between the people who use the health care system and the people who pay for it we will see costs rise.

    Back to Social Security, it seems privatizing an increasing portion every year may be the only way out of the mess. We have already started the process with IRA’s and 401k’s. I know of few workers today who do not want those additional measures having lost faith in the government administration of their retirement funds.

    Personally I blame the influence of the boomer generation for the mess. Wanting it all and none of the associated responsibility has cemented my view of boomers as the worst generation ever.

  6. Dave Schuler says:

    Steven Plunk, the very oldest baby boomers weren’t even of voting age when Medicare was enacted and weren’t born when Social Security was enacted. Problems with both of those systems date from their very inception.

    The Baby Boomers have made many errors and created many problems but creating the problems with Social Security and Medicare aren’t among them.

  7. ken says:

    Steve Plunk, you apparently don’t know many real workers. Social Security privatization was tried by Bush and was overwhelmingly unpopular with the American people and went exactly as far as it deserved to go – nowhere.

    You can forget privatizing the most successful and popular government program of all time. It will never happen. Beside, their is no problem with SS.

    Regarding medical care, please explain how the VA or Medicare are ‘irresponsible providers’ of medical care. Any way you look at it, they are the most efficient and least wasteful providers of medical care in our nation.

  8. I seem to remember a similar argument being advanced in the 80’s. That Reagan’s budgets were imposing a future tax burden that would have us all eating grass in 20 years.

    Does anyone know of a source for the data of “future tax debt” for the past 75 years. Before I start running in circles to the tune of ” the sky is falling” I always like to get a historical perspective.

  9. Hal says:

    I seem to remember a similar argument being advanced in the 80’s. That Reagan’s budgets were imposing a future tax burden that would have us all eating grass in 20 years.

    Um, yea. And GHWB ate his words regarding taxes to compensate. Clinton did so again – to the tune of wailing and gnashing of teeth by the conservative doomsayers saying we’d all be eating grass within 4 years because it’d kill the economy.

    Of course, we had the longest sustained economic boom in history right after.

  10. Steve Verdon says:

    I seem to remember a similar argument being advanced in the 80’s. That Reagan’s budgets were imposing a future tax burden that would have us all eating grass in 20 years.

    Yes, and we see something similar today. The current deficit is declining, but the entitlement programs are not being addressed as they were in Reagan’s day. If the same solution is used it will mean a very, very large tax hike. Funny how nobody seems to recall that tax increase under Reagan.

    Um, yea. And GHWB ate his words regarding taxes to compensate. Clinton did so again – to the tune of wailing and gnashing of teeth by the conservative doomsayers saying we’d all be eating grass within 4 years because it’d kill the economy.

    Of course, we had the longest sustained economic boom in history right after.

    Right. Those tax increases did not kill the economy. It might have slowed things down for a bit (e.g. GHWB), but the second tax increase was particularly well timed, right when the expansion was taking off. Not that I credit Clinton or his Administration with this fortuitous timing.

    Dave,

    My point is threefold: healthcare costs are high because of government involvement, healthcare segment salaries are high because of government involvement, and creatures of the government have no business complaining when the government bites back.

    Let me see…government, government, government and even more govenrment. Yet ken tells me we need…more government. Hmmm, I think I’ll just take the pony and go home.

    Ken,

    Where is that pony again?

  11. Steve Verdon says:

    Oh and,

    Do you really think that medical care is a free market kind of thing subject to the same market incentives as department store shopping?

    Yes. I know you think it is some sort of right, but I’m just not seeing it. Resources, medical resources, are finite. We simply cannot guarantee that everybody can have everything they want. Your only alternative is to have the government tell you what you can have vs. the market.

  12. Dave Schuler says:

    There we disagree, Steve. I think we’ve got a supply bottleneck that’s created by a number of factors (including government). Unless the supply bottleneck is corrected costs will be out of control whatever else we do (including consume less).

  13. ken says:

    Resources, medical resources, are finite.

    Not really. Real estate is finite. But we can always increase the supply of doctors, nurses, hospital beds, etc.

    What is finite is the *demand* for medical resources.

    Once you fill the need for a heart bypass surgery you are not going to buy another one no matter how good a deal the doctor may give you. This is not like buying towels at the department store. You may another set of towels, even without need, just because they are on sale.

    Medical care is not subject to market forces.

    Despite your ignorance Steve shopping for medical care is not at all like shopping for towels.

  14. Mister Biggs says:

    Steve Plunk, you apparently don’t know many real workers. Social Security privatization was tried by Bush and was overwhelmingly unpopular with the American people and went exactly as far as it deserved to go – nowhere.

    You can forget privatizing the most successful and popular government program of all time. It will never happen. Beside, their is no problem with SS.

    Its so successful the return on the amount taken out of my paycheck is way higher than same amount of money over put in 401(k) and IRAs for the long term rate of return.

  15. Does anybody have a link to the “tax burden” over time? I would like to see if $156K per person is above or below the historical average. It seems like a good starting point for evaluating these sorts of claims.

    If it is higher than average, then the potential for a problem is more realistic, if it is lower than average, then we have been here, done that before and you need to show what is unique about this situation.

    Also remember, these programs were put in place by legislation and they can be removed by legislation. Right now the political cost is high because those hurt most are on the receiving end and our skewed tax system puts half the tax burden on the top 5%. And those who gain are spread across the voters. Balancing the pain (Steve’s preference would be higher taxes, mine would be budget reductions and legislation reform) is going to happen as the pain gets distributed.

  16. Dave Schuler says:

    Not really. Real estate is finite. But we can always increase the supply of doctors, nurses, hospital beds, etc.

    Not so’s you’d notice. The number of doctors graduated from U. S. medical schools every year hasn’t changed in a generation.

    That’s where I differ from Steve: only government can affect that. Docs won’t do it on their own.

  17. Steven Plunk says:

    Dave S.,

    I agree boomers didn’t create the problem but I still see the self centered nature of them as contributing to the growth of the programs without the revenue growth to accompany it. It’s a minor point and petty on my part but following the boomer generation is like following a continuous societal train wreck.

    Ken,

    I know many workers, heck I’m a worker. Privatization, like I pointed out, is going on right now through IRA’s and 401k’s which my generation is counting on more and more. Increasing that private share would help us. I thought it was the politicians that didn’t like it.

    I’m not sure if you were asking me about the VA or medicare but I would guess the reason they are efficient in providing care is that they provide minimal care compared to the rest of the system that goes hog wild with preventative medicine.

    I appreciate both of your comments.

  18. Dave Schuler says:

    I’m not sure if you were asking me about the VA or medicare but I would guess the reason they are efficient in providing care is that they provide minimal care compared to the rest of the system that goes hog wild with preventative medicine.

    Actually, no. You might want to take a look at this to learn what the VA’s doing right. It includes prudent use of technology in streamlining procedures, economies of scale, and longterm relationships with its customers.

  19. RJN says:

    Here is an article about an interesting cost overhang coming from our friends that used to live in Mexico. The concept is “equalization” of S. S. benefits re: Mexico.

    http://www.eagleforum.org/column/2007/jan07/07-01-17.html

  20. just me says:

    Please don’t tout the VA as some kind of model to me.

    My husband is a disabled veteran and has used the or tried to use the VA system since the mid 90’s.

    VA care in Durham was excellent. He had a great doctor, and any needs he had were met well, and in a timely manner.

    Since moving to NH I can’t say anything nice about the VA system up here. It takes months just to get an appointment outside of their ER system. They work on very limited hours.

    And he can’t get any of the medications he needs through the VA, because the VA doesn’t carry them.

    I am just not overly impressed with the system. Overall, in the big picture it may do a fine job of meeting the needs of veterans, but there are some huge gaps in the service, and if you are living in one of those gap areas, you realize it isn’t the wonderful system it is painted.

    Not to mention I they seem to have issues with protecting veterans information.

  21. > What is going to have to happen is some
    > combination of the following:

    Um, you forgot a third option:

    3. Invade other countries and take their resources

    The U.S. has a huge military advantage over anyone else, and, historically, this has been a way for contries to deal with all sorts of scarce resources from everything from land to women.

    Yeah, unlikely, but certainly an option.

  22. TJIT says:

    Ken,

    You should do a google search on Canadian medical treatment wait times.

    The vaunted universal health care system you desire consistently treats patients worse and makes them wait longer for critical diagnositc tests and treatment then the US system does.

    Your faith that the government could do things cheaper and better is touching. It also indicates you have never had first hand experience with how government programs actually work once implemented.

  23. cj says:

    This is (one) thing I think is wrong with our health care system re: insurance. I have to have a physical for my registered daycare. It costs $150 for the ‘physical’ which isn’t ANY kind of physical — they listen to my heart, look in my ears, nose and throat, and that’s it. It takes 5 minutes with a nurse practitioner. I have to pay a $20 co-pay. They fill out a form.

    You can damn well bet if I had to pay the $150, I would be screaming bloody murder. There is simply no way they can justify that, other than my insurance is willing to pay a set amount for an annual ‘physical’ and, as an accepted member of my insurance, they bill that amount.

    I could go to another clinic that would charge $65 for the same physical, not accepted by my insurance, but it would be all out of pocket — so why would I pay the additional $45 for simply filling out a form?

    The disconnect between the consumer and the payer is, in my opinion, a major problem with the current system.