Cost extravagances of this kind are inevitable when there has been a longstanding culture of budgetary indiscipline. They arise in any organization that has been exposed to too much easy money for too long. (I should know: I’ve worked on Wall Street.) What’s needed is a period of retrenchment. A focus on costs. A reformulation of strategic purposes and priorities. If these things are done right, the result will be a re-energized military. Leaner, stronger, more purposeful, more focused. Better able to carry out the tasks we assign it, less distracted by nonsense.
Obamacare
The Pentagon, however, is like some kind of budgetary Walmart, some fuel-sipping Japanese mini-car, in comparison with the beast which is health care. Even in those far-off days before Obamacare, the situation was appalling. Over successive administrations, through countless reforms, despite constant legislative attention, health care in the United States failed to deliver.
Take, for example, the most basic duty of a healthcare system: that it extends life. Of course we want other things too: we want our healthcare services to reduce pain, to respect our dignity, to discuss clinical choices. Heck, we probably want free coffee, comfortable waiting rooms and a short walk to the parking lot. But when it comes right down to it, we want our doctors and nurses to give us more years of life. Figure 3.3 sets out the potential years of life lost through premature death for the men and women of various major countries. The way this statistic works is by comparing actual age at death with expected age at death. So if you could, on the whole, expect to live to 75, the death of a 25-year-old would count as 50 years of life lost, the death of a 74-year-old as a single year only. On this measure, and considering all 29 countries for which the OECD has data, the United States scores worse than every nation except Hungary and Mexico for women. For men, the US scores worse than every country except those two, Poland, and Slovakia.
Figure 3.3: Potential years of life lost, per 100,000 people, selected countries
Source: OECD (figures for 2009 or most recent year available).
There’s no way to excuse or explain away these figures. The American healthcare system allows far too many Americans to die early. No doubt we have better hospital coffee, some wonderful parking lots, some caring nurses, and some terrific doctors—but too many Americans die too young. To find worse healthcare outcomes in the rich world you have to travel south to Mexico, or to Poland and Hungary in the former Soviet bloc. There’s no way any American should find these results acceptable.
Then there’s the cost. The extraordinary, eye-watering, economy-destroying cost. No economy in the world spends on health care the way America does. We spend over twice what the British, Japanese, Italians, and Australians do per capita, and almost exactly twice what the French do. (The figures shown in figure 3.4 are based on purchasing power parity, a way to remove any distortions arising from constantly moving market exchange rates.)
Figure 3.4: Healthcare spending per capita, selected countries
Source: OECD (figures for 2009 or most recent year available).
Defenders of US health care like to point out that ours is a private sector system, true to the red-as-blood nature of American capitalism. Yet if you look only at public spending on health care, we still outspend all those other countries I’ve just mentioned. Measured in the only way that matters—in dollars and cents—our government is more involved in health care than any other government in the world, with the one exception of tiny, socialist, oil-rich Norway. In effect, we pay for our health system twice over: once indirectly through taxes, once directly through insurance. (Most people will find that their employer picks up the tab, but that simply means that the employer has less money available for salaries. There are no free lunches.)
And of course, it’s not just doctors and nurses we’re paying for. We’re paying for the massive administration costs arising from insurance company bureaucracy. We’re paying for the huge costs of medical litigation, for all the cover-my-ass medical tests conducted as a protection against that litigation. We also pay in uncertainty and worry. You may have paid your healthcare premiums regularly for twenty years, but that won’t necessarily stop your insurer trying to dodge a claim or chisel you out of your due when it comes to settling your bills. These anxieties inevitably come just when you least need them: when you’re feeling sick and financially insecure. The exponentially rising cost of health care over recent decades has a lot to do with the stagnating incomes of ordinary American families. The economy has grown, but far too much of that growth has ended up in the pockets of the health insurance behemoth.
Although these things affect us all individually, they also have an impact at a corporate level. One of the reasons why the Big Three auto makers struggled against foreign competition was their legacy health costs: their obligation to fund the spiraling health costs of retirees. Those costs, which amounted to as much as $1,700 for every vehicle produced, handed a huge competitive advantage to Japanese and European auto makers seeking entry into the US market, a competitive advantage that Detroit was powerless to counteract.27 And any global company considering where to build a new factory or research facility has to factor those costs into the equation. Build in the United States and face a huge healthcare bill? Or build elsewhere and let the government take care of those costs? For many companies, the answer will be obvious. And there’s part of the explanation for the US’s current high levels of joblessness and underemployment.
That was the background in 2008 when President Obama swept into power with a mandate for change. He had the inbox from hell already—Iraq, Afghanistan, banking crisis, recession—but the pressing need for healthcare reform dumped another huge problem on to the To Do list. Right at the top of the reform agenda should have been the topic of cost. There was no other sane priority. In case you should doubt that, take a look at the projected costs of Medicare and Medicaid over the next seventy years in figure 3.5.28 The data are drawn from a 2011 study conducted by the nonpartisan Congressional Budget Office. They present the CBO’s ‘alternative fiscal scenario,’ which is in fact its core simulation, as it reflects various changes in the law which are widely expected to take place. In essence, the data in the graph represent the CBO’s best guess of the future, assuming that there is no fundamental shift in policy.
Figure 3.5: Projected spending on Medicare and Medicaid, 2011–2085
Source: ‘CBO’s 2011 long-term budget outlook’, Congressional Budget Office (www.cbo.gov), June 2011.
That graph is one of the single most scary graphics in this book. It’s not too much to say that Medicare and Medicaid are starting to kill the federal budget. Indeed, the CBO acknowledges precisely that. Its report includes a projection of federal debt out to only 2036, even though the projections for healthcare spending run all the way to 2085. Why? Because beyond 2036, the government’s debt rises to more than 200% of GDP. To put it simply: within the space of a single generation, on current policies, as measured by a nonpartisan government statistical bureau, the government is going bankrupt. That’s what the CBO data are telling us. The coming old age of the baby boomers is like a cost tsunami, still a few miles offshore but moving fast and heading straight toward us. Faced with this clear and present danger, the government needed to act. It needed to get a grip on costs first, deal with universal coverage second.
What we got was the inverse of that. In Obamacare, we got a plan that aimed to ensure near-universal health coverage for Americans but one in which cost control was nowhere to be seen. It wasn’t even part of the design. In frank comments made after he had left Capitol Hill, David Bowen, the former health staff director of the Senate Health, Education, Labor, and Pensions Committee, said: ‘This [Obamacare] is a coverage bill, not a cost reduction bill. There is stuff here that will begin to address the issue of cost, but this is not a cost reduction bill with a bit of coverage on it—it is really trying to get coverage first.’29
Increasing the scope of health care before tac
kling the critical question of cost was always bound to be expensive, yet the CBO estimated that the reform would reduce the budget deficit by $119 billion over ten years.30 Now that makes no sense. You can’t expand healthcare coverage to reach some 30 million or so extra Americans and yet not experience a hike in costs. Needless to say, the reform does increase costs; it merely tries to balance those costs with additional taxation. Seeking to estimate those costs, the CBO placed the total burden of Obamacare at $940 billion over ten years. So, according to the plan’s promoters, the cost tsunami which was heading our way before is still heading toward us, only this time it’s swollen by another trillion dollars.
Unfortunately, those statistics make no sense. The true costs of Obamacare don’t really kick in until around 2015.31 So when the CBO projects a cost of $940 billion over the decade that runs from 2010 to 2019, it’s actually projecting a relatively modest cost for the first five years (a total of $80 billion) and a huge cost ($715 billion) for the five years from 2015 to 2019: an average of $143 billion per annum. That’s a huge sum of money.
Because the numbers in this book are frequently so vast, it’s essential that we keep giving ourselves a sense of scale. Over four of those five years, the $143 billion annual costs of Obamacare amount to $572 billion, or, if we add a little interest, $600 billion. That’s more than the entire national debt of Canada.32 If our national finances were in a strong state, you could argue that this price was a price worth paying. At a time of funding crisis, it’s an additional burden of insane proportions.
And then there’s the question of whether the government’s numbers are dependable. After all, those in charge of the planned reform had every incentive to massage the numbers down. And it so happens that we don’t entirely need to trust the government’s numbers, because we can review what happened to Mitt Romney’s healthcare reforms in Massachusetts—effectively a prototype for President Obama’s federal version. The experience in Massachusetts has been a double disappointment. First, the number of uninsured people remains stubbornly higher than was projected (and most of the uninsured who have taken out insurance have only done so thanks to extensive subsidy). Secondly, and more alarmingly, the costs are out of control. It is now estimated that ‘Romneycare’ will cost the state some $2 billion more than predicted. At the same time, health insurance premiums, which had increased more slowly than the national average, are now increasing 5.8% faster. The average employer-sponsored family health plan costs almost $14,000 a year, the highest rate in the nation.33 In short, the likely effect of Obamacare, based on the closest statewide model in existence today, is that public costs will be substantially larger than anticipated while private costs will also grow more rapidly.
In short, Obamacare has taken the single worst-controlled area of government (and private) spending and severely exacerbated the problem, in the midst of recession and unrelenting funding pressures. It’s insanity cubed.
*
The themes explored in this chapter—the fantasy figures on which the federal budget is based, the too-low taxes, the colossal waste of the Pentagon, the fearsome costs of Obamacare—these things go a long way to explain why we are currently spending a trillion and a half dollars more per annum than we are raising in tax. They explain why the US budget deficit is in the red and why, after three broadly peaceful decades, the US government has managed to end up owing $14 trillion while countries like Sweden have somehow managed to accumulate net assets.34
We’ll explore in a later chapter just why politicians have allowed this position to arise, but we can’t quite leave the topic of the federal deficit without talking about the last-minute deal struck to raise the federal debt ceiling in July 2011. It’s truly difficult to know who emerged from those negotiations with more dishonor. The Democrats needed to get specific about cuts to entitlements. The administration needed to get real about the need for austerity. The Republicans needed to put tax increases (or at least a bonfire of tax exemptions) on the table. None of them acted with any responsibility on their ‘core’ issues. Yet in deliberately threatening default, the Republican party took things one step further. They pointed a loaded weapon at the very heart of American prosperity and threatened to pull the trigger if their unreasonable demands weren’t met. The bargaining tactic was as low, as stupid, and as destructive as I’ve witnessed in thirty years of trading the financial markets. Even Berlusconi has never behaved as badly.
When the ratings agency Standard and Poor’s (S&P) promptly reduced the US credit rating by a notch to AA+ with long-term negative outlook, the firm came in for furious attack on every side.35 But S&P was right. If anything, it was too cautious. The creditworthiness of any borrower rests principally on a test of character: the borrower’s iron determination—or otherwise—to repay his debt. By posturing in Congress, and by evincing delight at the success of that posturing, the Republican party deliberately created doubt as to the fundamental character of the United States. Would the US pay its debts come hell or high water? Or would it risk default because of a petty squabble? For a period of weeks, no one knew the answer. And though the immediate deadlock has been overcome, the answer is still as unclear as ever. That is a shameful fact.36
The problem runs deeper yet. A corporate borrower repays debt by earning profits. If its profits disappear, so too does its creditworthiness. A sovereign borrower has no business to operate, no profits to make. Ultimately, the creditworthiness of a sovereign borrower depends on its ability to levy tax and on the willingness of the populace to pay those taxes. The Tea Party movement and its leaders in Congress are deliberately corroding the government’s legislative and administrative ability to levy tax. Every new impediment to that tax-raising ability is a further proof that S&P, alone among its peers, has recognized the grim truth about US politics today. Character matters, and our leaders are all out of the hard stuff.
All this sounds like a serious position for the country to be in, and it is. Unfortunately, however, it’s only the beginning of an outline of the problem. The whole picture is so very much worse, it’s hard to put numbers on it. Back in 2005, economists Jagadeesh Gokhale and Kent Smetters produced a careful study which estimated the value of the US fiscal gap—in effect, the country’s true national debt—at a stunning $65.9 trillion, or about four and a half times American GDP. More than the GDP of the entire planet, in fact.37
That figure sounds so extreme, you might think it was based on some strange assumption, or some totally inappropriate manipulation of the data. Unfortunately, the exact opposite is the case. Gokhale and Smetters’ data are based on the same accounting standards that any private sector firm is obliged to employ every time it draws up a set of accounts. Those are accounting standards that make perfect sense, that drive the investment patterns of businesses and individuals across the world, the ones you would adopt if you went into business.
And it gets worse, because that $66 trillion number is now six years out of date. Eagle-eyed readers may have noticed that the US economy has deteriorated rather sharply since 2005. Economic prospects are worse, federal entitlement programs still hopelessly overblown. The consequences for US indebtedness are catastrophic. The only good news is that, in a way, once you’re bust you’re bust and it doesn’t make too much difference just how bust you are. Unraveling that whole sorry tale is the subject of the next chapter. (There is some good news in this book, by the way, but you’ll have to wait for it a while. Ponzi schemes create a lot of things, but warm and fuzzy good-news stories aren’t among them.)
4
A hole as big as the world
A balance sheet is in essence so simple that you don’t need to be an accountant to understand one.
On the left-hand side, you have your assets. Stuff you own. Cash, other financial assets, inventories, property, equipment. If you own it, it’s an asset. The liability side is simple too. Here you write down all the money you owe. That includes money you’ve borrowed from banks or th
e bond markets. It also includes obligations you incur in the normal way of running a business: money you owe to your utility suppliers, your landlord, your raw material providers, and so on. And it includes pension obligations.
Now, before we start to talk about the government’s Ponzi-ish approach to pensions, we need to define some terms. There are two main ways in which an employer can offer a pension. The prudent method is for the employer to commit to a certain level of pension contributions for each employee. So if a given employee earns a salary of $50,000, the employer might agree to contribute $5,000 each year into a pension fund for the benefit of that particular employee. Because this type of plan fixes the employer’s contribution, it is known as a ‘defined contribution’ plan and—if the employer keeps current with its contributions—there’s no reason why any pension liability should mount up. He or she just needs to pay the agreed amount into the pension fund and that’s it for the year. As you might predict, this type of pension is popular with employers, because it’s so simple. If the payments are sufficiently generous, employees can be well provided for, while employers understand precisely what the cost of their obligations is.
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