Arnold Kling  

The Iceberg Groweth

Kindle-nomics... If You'd Listened to Me, You'd...

From a new analysis by the Congressional Budget Office:

in the absence of changes in federal law:

--Total spending on health care would rise from 16 percent of gross domestic product (GDP) in 2007 to 25 percent in 2025, 37 percent in 2050, and 49 percent in 2082.

--Federal spending on Medicare (net of beneficiaries’ premiums) and Medicaid would rise from 4 percent of GDP in 2007 to 7 percent in 2025, 12 percent in 2050, and 19 percent in 2082.

Those results show significantly higher federal spending on Medicare and Medicaid under current law than other official projections do, which typically assume that spending on those programs grows much more slowly in the future than it has in the past. For example, although the projections by CBO and by the trustees of the Medicare program (under their intermediate assumptions) track each other relatively closely for the next two or three decades, by the end of 75 years, Medicare spending under CBO’s projections is about 50 percent higher.

They are telling us that the standard estimate that Medicare faces tens of trillions of dollars of unfunded liabilities in the future--the reason I refer to Medicare as the fiscal equivalent of the Titanic--is too optimistic.

Just so you won't miss the point, the analysis says,

The main message of this study is that, without changes in federal law, federal spending on Medicare and Medicaid is on a path that cannot be sustained.

If you read the report, make sure you get to the last chart, which shows what happens over the next 75 years if health care spending relative to other spending rises at the same rate as it has over the past 30 years. (That is not the assumption that the authors make in the report. Implicitly, they invoke Stein's law--anything that cannot go on forever, stops.)

Comments and Sharing

COMMENTS (3 to date)
Floccina writes:

I think that it will not happen becuase people will start to find ways around the problem. It is already happening in small ways.

Mike writes:

What? Only 99% share of output? At some point the iron laws of economics set-in. Unfortunately, I feel the economy will come to a grinding halt. However, it will start out as a general malaise much like we had in the 1970s. I have faith in this country. It is a sleeping giant but eventually it wakes up. Too bad it has to pay a very heavy price for its slumbering. I guess that is the price we were put on this earth to bear!

Kurt Brouwer writes:

No doubt Medicare funding will require some sacrifices, however these reports of what will come to pass in 75 years are quite silly in my opinion. First, what would forecasters have predicted for our future in 1932? Or, 1952, 1962, 1982? Second, looking out so far requires many assumptions that we cannot know about and probably would not agree with. Third, how big will our economy be in 75 years? If we use average GDP growth of 3%, we get to $129 trillion in annual GDP. With that size economy, problems that seem vast today will be resolved more easily.

But what about the paradigm-altering changes we have seen in the last 15 years? The Internet, WWW, globalization, worker productivity growth, medical advances and so on? I believe it is highly likely that technological and economic progress will make it simpler and easier to resolve these issues.

We certainly have problems with regard to entitlements (Social Security, Medicare etc.), but they really are political rather than purely economic. We simply lack the will to enact meaningful changes. That will change when things go further and we will then solve them.

As Churchill said, '...America always does the right thing after having tried every other option.'

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