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A massive fiscal blind spot

Which should you pay more attention to? The media and most DC commentators are obsessively focused on the sequester, which affects a trivial amount of government spending in the coming year: only about 2% of total planned federal spending of $3553 bn. That's also relative to a baseline that includes increased spending, so actual net cuts are unlikely.

Yes, the sequester drama is bad for some things. It's bad if you're a bear, because national parks will be hit. It's bad if you're a defense contractor or live in Northern Virginia. But it's not the fiscal armageddon the press makes it out to be.

Alternatively, you could pay attention to a potentially transformative change in the whole future of government spending, one of the biggest surprises in fifty years, and one which will do to affect the future of US taxation, spending, wages and competitiveness than any other development.

The trouble is it sounds boring on the surface, because it's buried in an actuarial report on Medicaid from two weeks ago.

The 2012 Medicaid Actuarial Report released today contains good news. It shows that Medicaid benefits spending per beneficiary is estimated to have decreased by 1.9% from 2011 to 2012. This decline in per beneficiary spending is virtually unprecedented. Except in 2005-2006, when the cost of prescription drugs for Medicaid-Medicare dual beneficiaries shifted to Medicare Part D, Medicaid spending per beneficiary has never declined from one year to the next in the 47-year history of the program. Health care spending growth has generally been slow over the past few years, but Medicaid spending growth in 2012 is well below spending growth in the rest of the health care economy.

The entire fiscal future of the United States comes down to essentially one thing: the rate of growth of healthcare spending. In comparative terms, almost nothing else matters.

It's healthcare which drives most of the increases in government spending. It is the fundamental driver for the future fiscal solvency of the federal government (because the government spends so much on Medicaid and Medicare), and the states (mainly through their share of spending on Medicaid). It has a massive impact on take-home wages in the private sector (because the spiraling cost of employee health benefits holds down cash wages) and competitiveness (because it raises the cost of employing US labor).

At present, the most likely outcome, according to CBO, is federal spending alone on healthcare will rise by 5% of GDP in the next twenty years. That's more than the sum total of everything the Federal Government spends money on aside from entitlements and defense – i.e everything from the FBI to NASA to education to the CDC and airtraffic controllers.

For comparison, the whole federal income tax raised just 7.3% of GDP in 2011. If you think current fights over taxing the rich and raising revenue are bitter, just wait until you're asked to pay 70% more in your federal taxes.

That's why the rate of growth of healthcare spending is the single most important economic number in the United States in the medium term. The softening of healthcare spending growth has been steadily more evident for about three years now. It has mostly been put down to the recession. But it seems to have begun before the recession.

Of course the GOP expects Obamacare will make things far worse, despite its various pilot programs to experiment with cost control. However, some of the cost containment measures in the Affordable Care Act may work. And plenty of entrepreneurs are looking for ways to cut healthcare costs as well.

The fact is no one has fully explained the slowdown in healthcare spending yet. Perhaps it is just temporary. Few healthcare economists are willing to be confident yet.

Or it could be bending the cost curve and hence the whole future of fiscal policy. That bears watching.


2017-05-11T17:32:58+00:00 March 11, 2013|Current Events, Economics, Politics|