Of Medicare & Medicaid & Whether PIIGS Have Wings

I have pointed out in recent posts that, according to the CBO, the U.S. is on the road to insolvency. I have argued that those who strenuously oppose any cuts in Medicare and Medicaid benefits are not doing those programs any favors. My friend Cory Heidelberger wrote an interesting post in reply that I didn't see until the other day.

Cory argues that his position, a "commitment to maintaining benefits over reducing the deficit," is more popular even among Republicans than my position, which is presumably a commitment to reducing the deficit over maintain benefits." I could point out that this is the kind of false choice frequently criticized by our President. I think that benefits are going to be reduced one way or another of necessity and the only way of protecting benefits is to bring the deficit under control. Cory doesn't bother to address the fiscal realities. He seems to think that the only issue is who wins the next election, and he may well be right in his analysis of public opinion.

I continue to think that the more important question is the viability of the U.S. economy and the larger world economy. I note that the fiscal mess in the European community is not getting better. Greece is going to default. Portugal, Ireland, and Spain are headed in the same direction. Now, however, the PIGS have become the PIIGS. See Meagan McArdle:

Italy's budget deficits are relatively modest compared to, say, Ireland, but their debt is about 120% of GDP. The government has passed a plan that will balance the budget by 2014, but as with most such plans, most of the cutting comes later, while the current cuts are small. This may well be sensible fiscal policy, given the current economic climate, but it is not reassuring to the markets.

Italy's debt/GDP is almost twice as large as that of the U.S. It will take us more than a decade to get there at the present rate. The problem is that governments running deficits have to borrow from someone, and lenders charge interest. When the confidence of lenders declines, they charge more for their money. As interest rates increase, it is harder for governments to balance their budgets. Italy's interest rates are going up. If Italy goes critical, the European crisis goes global. American banks are woven into a web of global financial institutions.

Italy's problem is the general problem and it is our problem. Governments everywhere have spent beyond their means. China is awash with debt. There is on one to bail us all out.

Or perhaps we should ignore the rest of the world and focus on the anemic recovery and dismal job growth at home. From Dan Henninger at the Wall Street Journal:

Robert Lucas, the 1995 Nobel laureate in economics, has spent his career thinking about why economies grow, and in particular about the effect of policy making on growth. From his office at the University of Chicago, Prof. Lucas has been wondering, like the rest of us, why, if the recession officially ended in the first half of 2009, there hasn't been more growth in the U.S. economy. He's also been wondering why this delayed recovery resembles the long non-recovery years of the 1930s. And he has been thinking about the U.S. and Europe…

"Is it possible that by imitating European policies on labor markets, welfare and taxes, the U.S. has chosen a new, lower GDP trend? If so, it may be that the weak recovery we have had so far is all the recovery we will get."

What Cory wants is what most liberals want: for the U.S. to be more like Europe. They may be getting their wish.

Forgotten in most discussions of the U.S.-Europe comparison is that for the first 70 years of the 20th century, continental Europe's growth rose alongside that of the world-leading U.S. and U.K., especially after World War II. Through the 1960s, he says, there was every reason to expect a common, high living standard for all of us. Then, "in the 1970s, their catch-up stalled."

A 20% to 40% gap in income levels emerged between the U.S. and Europe, reflecting a lowered European work effort. In Prof. Lucas's view, that gap represents the cost (largely taxes) of financing a larger welfare state from 1970 onward. Other economists, he says, have cited a 30% loss in GDP per person in Western Europe since the 1970s.

"If we're going to move to a European welfare state," says Prof. Lucas, "we're going to have to pay a European price." And that price could be a permanently lower level of GDP per person. The U.S.'s amazing 100-year ride would slow.

Cory and I have lived our lives in an America that was very different from Europe. I think we were better off for it. He may disagree. I think that his insistence on benefits over fiscal responsibility will, if it wins out, mean that the average Joe will have to accept a poorer future. Worse still, I think that it risks economic catastrophe. Either way, I think that economic realities are more important than who wins the next election.

Comments

[Jimi]

Ken,

"commitment to maintaining benefits over reducing the deficit"

And how does Cory explain where we get the money when interest rates are adjusted back up to where they should be instead of being falsely held low? As of right now, we are committed to $250 Billion in interst payments on the debt. If the interest rates were to adjust to a position that is more in line with historical rates, revenues would be committed largely to interest payments on the debt.

That would leave nothing, but even more borrowed money in an attempt to keep up with the benefits schedule.

Economic Pain is unavoidable. That means benefits, taxes, and standard of living all will be affected. The best solution would be to apply that pain starting now instead of waiting till the last second. If we had political leaders who were not interested in becoming Europe, we could deregulate, lower taxes, confront unions, and begin the long road of grwoing our way out of this hole.

[Stan Gibilisco]

"Italy's problem is the general problem and it is our problem. Governments everywhere have spent beyond their means. China is awash with debt. There is no one to bail us all out."

If our entire world is in debt, to whom is the money owed? The Vulcans? The Xindi? The Romulans?

[Jimi]

Stan,

"to whom is the money owed"

Whoever controls the most resources.

[Ken Blanchard]

Stan: you have asked a philosophical rather than an economic question. As the philosopher John Searle has pointed out, money is odd. On the one hand, it is very real, as anyone knows who has run out of it or come into a lot of it. On the other hand, it seems to exist entirely as a social construct. It matters only if someone else believes in it. You can't buy off a hungry bear with any amount of money.

The world debt represents nothing more nor less than the trust that people have in the future of their investments. If that collapses, we'll all be roasting rats over rusty barrels.

[Dave]

And so the question is really, do conservatives believe in the construct of cash and debt, or has their faith in anything of this world been expired by their belief in GOD?

Not so much "I think, therefore I am" as "I believe therefore it is"...

"I believe Obama was not born in the USA"... "I believe lower taxes create greater revenue"... "I believe GW Bush is no longer President, therefore he had no effect on our debt situation"... (and we shall never mention his name again) "I believe that if WE can't meet our debt obligations there will be no consequences"...

Faith does NOT change reality!

[penny auction]

I believe that if WE can't meet our debt obligations there will be no consequences...