Forum for Innovation

A number of policy analysts, including Ezra Klein, Nate Silver, and Chris Conover, have been writing recently about how healthcare spending is largely driving the nation’s debt. Klein finds this to be a cause for hope, as healthcare spending has slowed considerably in recent years. If there is just one factor driving the debt and that factor is moderating, then the problem is perhaps not so bad, Klein argues. While he is correct that lawmakers should focus intensely on healthcare policy and the looming threat of entitlements, there are at least three reasons why his optimism is overstated:

1. The recession and sustained tepid economic recovery have led some patients to cut back on healthcare services, but that is (hopefully!) temporary. Slow growth, weak labor markets, and fiscal and economic uncertainty are not solutions to rising healthcare costs. Klein acknowledges that the slowdown could be “a recession-induced blip,” but he does not seriously entertain the idea.
2. While aggregate healthcare spending has indeed slowed recently, Medicare spending is outpacing the growth of the economy overall. Any large government program that is growing faster than the economy for a sustained period of time is problematic.
3. Healthcare spending represents the greatest fiscal threat, but discretionary spending is not irrelevant. Simply cutting discretionary spending will not bring about sustainable deficits, but federal discretionary spending has been on the rise in the last decade. In fact, the tax hike enacted earlier this month, at $600 billion over the coming decade, is smaller than the increase in discretionary spending observed over the last decade. The so-called stimulus bill—which was a large contributor to the 17% increase in federal spending in fiscal year 2009—is just one example.

The key metric for gauging our long-run fiscal sustainability is public debt as a share of the economy, known as the debt-to-GDP ratio. It was just 35 percent in 2000 and 41% in 2008. At 73% right now, it not only is cause for concern, but also casts doubt on assertions about our bright debt future. 

NOTE: Alex will be participating in a Google Hangout on Jan. 31 at 2pm to discuss spending, debt and deficits. Learn more and watch live here and follow on Twitter with #ChamberChat.