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The ice has broken, and after months of freeze-up, the U.S. Congress is suddenly hurtling toward enactment of a colossal healthcare reform.
The vote count remains uncertain. Things could still go wrong for Democrats. But the probabilities are strong that Barack Obama will be signing a historic bill sometime next week.
It’s a big win for the President. It’s a huge expense for America. What will it mean for the rest of the world? Very likely: much more U.S. borrowing over the decade ahead, a lower dollar and higher U.S. interest rates.
Health-reform supporters are relying heavily on a report from the Congressional Budget Office that estimates that reform will actually reduce the cumulative U.S. budget deficit slightly over the next 10 years. Well maybe. But the savings in the bill are highly theoretical, the taxes in the bill will be controversial and the expansion of subsidies and other benefits is a hard fact.
The Washington Post reported Friday: “As much as the 25-page ‘score’ of the legislation was treated as holy writ in Washington–Democrats eagerly flagged its conclusion that the package they aim to pass this weekend would cut the deficit by $138-billion over the coming decade–the reality is considerably messier. Budget experts generally have high praise for the work of CBO analysts, the non-ideological technocrats who crunch the numbers to estimate the fiscal impact of legislation. But their work is often more art than science, and although the forecasts that accompany legislation are always filled with uncertainty, this one contains more than most.”
Health-care projections are notoriously difficult. As the American Enterprise Institute’s Steve Hayward has pointed out, similar estimates were done at the creation of the U.S. Medicare program in 1965: “Government actuaries predicted that the cost of a day’s hospital stay by 1985 would be $155 and that the hospital insurance portion of Medicare would cost $9-billion by 1990. The actual average cost of a hospital day by 1985 was over $600; instead of $9-billion, the hospital-insurance program cost $63 billion in 1990.”
Put another way, the true cost of the hospital-insurance program was 700% of what actuaries had predicted. Adjusting for inflation, the real cost turned out to be almost double the forecasted estimate.
As is, Obama’s plans will raise America’s debt level to 90% of GDP by 2020. If CBO is right, health-care reform should not alter that big number very much. But what if CBO is wrong? Not nearly as wrong as its predecessors in the 1960s, but say 20% wrong?
In that case, by the year 2019, the Obama plan will be costing Washington five times as much as the Afghanistan war is costing today–and the U.S. will be headed toward a debt-GDP ratio closer to 100% than 90%.
The last time the United States got that in debt was in 1945, at the end of the Second World War. But back then, the way out of debt was obvious: As soon as the war ended, wartime spending would drop. But in 2020, the only way forward for the United States will be the way found by Canada in the 1990s, when Canada’s federal debt neared 100%.
That way is to allow the currency to depreciate (the Canadian dollar dropped from 85¢ U.S. in 1990 to an ultimate low of 63¢). Currency depreciation triggers an export boom, while suppressing imports. Government raises taxes and cuts services. The country earns more, consumes less and devotes more of national income to debt service.
To compensate for the money they’ll lose from the decline in the U.S. dollar, American lenders will demand an interest-rate premium. So (other things being equal) U.S. dollar-denominated interest rates can be expected to rise over the decade ahead. Higher rates will in turn further suppress domestic consumption.
Everything adds up to a tough decade for Americans, their equivalent of Canada’s tough decade in the 1990s.
In Canada, tough economic times translated into political turbulence, as every region of the country became convinced it was being ripped off by the others. Brian Mulroney’s Progressive Conservative party imploded, Quebec held a second referendum on independence, Albertans talked of building “fire walls” against the rest of Confederation, Ontarians elected governments of three different parties in a single decade (something they had not done since the Depression) and the governing Liberals held onto power in Ottawa with under 40% of votes cast.
The mood in the recession-wracked United States is already tense enough. What happens, though, when recovery comes–and incomes continue to be squeezed? When Americans return to work–only to discover that they are working to repay the nation’s debts, not to improve their own personal standard of living?
Look for an even tenser decade ahead, made tenser still by any added costs of Barack Obama’s vast new social welfare program.
David Frum is a resident fellow at AEI.
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