Why Health Care Matters and the Current Debt Does Not

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Letter Writer:

Ron Cavuto of Nashua, N.H.

Date Posted:

Oct. 17, 2012

Letter:

How did this absurd Democratic Party manifesto appear under the letterhead of the U.S. Federal Reserve? No need to curtail irresponsible spending, just keep raising taxes. No need to worry about diverting resources from private sector investments; interest rates are low so it doesn't matter. Health care is the biggest problem because we've made promises we can't keep, not because we are taxing insufficiently. Rather than rationalize fiscal insanity by assuming growth and higher taxes will solve everything, let's focus on correcting our lunatic fiscal practices.

Co-authors' Response:

Dear Mr. Cavuto,

Thank you for sending us your reactions to our article and giving us the opportunity to reply to your concerns.

Let us begin with what we agree on: "Health care is the biggest problem." The Congressional Budget Office (CBO) currently projects that spending on health care, relative to the size of the economy, will grow by 80 percent over the next 25 years. They project that how we respond to this long-run trend will determine whether debt held by the public is 53 percent of GDP in 2037 or 200 percent..

We base the bulk of our analysis on the debt projections of the CBO. The CBO (a nonpartisan government agency) makes all of its projections assuming that the U.S. government will meet its existing fiscal obligations. It is beyond the scope of our article to argue over how the U.S. government should equalize spending and revenue, whether it be through reneging on its Medicaid/Medicare commitments (as you favor), or collecting a larger share of income in taxes, or both. We simply make the objective (if not banal) observation that "no country can afford … permanent increases in government spending without increasing tax revenues." Anything otherwise would be "fiscal insanity."

As for your second point regarding "diverting resources from private sector investments," we refer you to a St. Louis Federal Reserve Review article for a survey of the basic economic theory with respect to "crowding out" and the impact of government financing on private economic activity. Intuitively, economics is founded on the simple principle of limited resources and unlimited wants. In a world where there are not enough resources to meet all wants, there is a shadow cost to using any resource for any specific purpose: it cannot be used for another purpose. This is formalized as the "opportunity cost." The cost of any action is the benefits that could have been accrued from taking the best alternative action, or opportunity. Of course, this is premised on the constraint on resources binding, or in other words that there are not enough resources to go around. If we interpret labor and capacity underutilization as a relaxation of the resource constraint, then the "opportunity cost" of private and public resource utilization is less than it would be during a period of full employment and capacity utilization.

Thank you again for your interest in our article, and we strongly encourage you to check out the CBO's "2012 Long-Term Budget Outlook" for a far more detailed view of the U.S. fiscal situation than we can present here.

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