Monday, June 29, 2009

White Elephant Safari

Tim Duy always writes a great column. The most recent one is about how, despite the fact that American consumers appears to have reached their limits, the US is still running a current account deficit and a fiscal deficit, and remains dependent on foreign capital. He thinks this is okay in the short run but worrisome in the long run. I agree, though I think the long run maybe longer than he thinks, and that at any rate, this is a two-sided question -- if China and Germany decide they want export economies and current account surpluses, that money has to go somewhere. At the international level, you can't blame the debtor more than the creditor, you can merely observe that the two are conspiring to mire themselves even more deeply in a situation for which we have no ready political solution. A stable dollar and business as usual now can lead to a larger crisis later.

But that was not my point. Backing up then, here's the quote:

Domestically, the optimal path is to meaningfully address the long term budget challenge. Does this mean cutting programs and boosting taxes now? No, quite frankly, at this juncture that would be an almost insane policy response, one that would not be appropriate for either the US or our trading partners. In the short run, such as policy response would be needlessly disruptive (indeed, that potential disruption is what keeps foreign central banks in the game of buying US Treasuries). Instead, you need to examine the policy space to find an obvious candidate for controlling the growth of aggregate spending in the US. And that exercise always leads you back to health care, and the realization that we spend an extra $1 trillion more than other industrialized nations, and we don't get much if anything for it. A trillion dollars is a lot of money; more in fact, than the recent pace of foreign central bank Treasury purchases. If you can meaningfully "bend the curve" on health care spending, you can see a light at the end of the tunnel. If you can't or are not willing to bend the curve, I fear waning global patience in sustaining US spending will result in a rude awakening that the tunnel of US fiscal policy ends at a hard wall.

Check out the budget chart though. People harp on health care because it is the political flavor of the day. But healthcare spending isn't any bigger and isn't growing any faster than defense spending. If the US goes bankrupt you can blame it on medicare. Or you can blame it just as well on the military. We are spending $500 billion more than Europe on defense. What are we getting for that money except another useless war? Why can't this be part of the political debate? Why has basic common sense been exiled?

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