Debt Ceiling Negotiations on Health Care are Mere Cost Shifting

July 15, 2011
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The US definitely seems to have weakened itself in the international sphere over the past decade. One could argue that the real damage to the US from the September 11 terrorist attacks was caused by the US overextending itself into Iraq and Afghanistan and getting paranoid about security and immigration on the home front. But those decisions were generally popular among Democrats and Republicans, and it’s still hard to say exactly what the right moves were.

The US definitely seems to have weakened itself in the international sphere over the past decade. One could argue that the real damage to the US from the September 11 terrorist attacks was caused by the US overextending itself into Iraq and Afghanistan and getting paranoid about security and immigration on the home front. But those decisions were generally popular among Democrats and Republicans, and it’s still hard to say exactly what the right moves were.

The current debt ceiling debate is another matter entirely. We are at serious risk of applying a self-inflicted wound that will be difficult to recover from. I remember in finance class being taught about the “risk free” rate, which was the foundation for all assumptions and calculations related to other assets and derivatives. That rate of course, was what was paid on US government securities. By even contemplating not raising the debt ceiling Congress –and the Tea Party caucus in particular– are in danger of erasing that assumption, driving up long-term borrowing costs, and undermining the role of the US dollar in the international system. Looking back a couple years from now I can’t imagine anyone in Congress who will be happy about causing that kind of damage, yet many appear to be in denial today.

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There’s talk of $1.5 or $1.7 trillion in spending cuts over 10 years, of which $300 billion or so is from Medicare and Medicaid. These cuts are pretty much a yawn, since they are not about structural reform, but rather just shifting costs around. I am in favor of cost shifts to wealthy individuals in Medicare, but that doesn’t do much to address the underlying drivers of costs. And by cutting Medicaid as well as Medicare, the cuts don’t do much if anything to improve inter-generational equity.

I hope we can get through this debt ceiling crisis relatively unscathed and then move on to a real debate about health care cost control before Medicare swallows us up.