Will Spending Under ObamaCare Trigger The Next Financial Crisis?
By Douglas Holtz-Eakin and Paul Howard
This week President Obama signed the final piece of the ObamaCare legislative agenda and put Democrats on record favoring a future downgrading of the United States' triple-A credit rating, setting up a financial market crisis that will make 2009's burst mortgage bubble look like a tempest in a teacup by comparison.
America's sovereign credit rating works much like a consumer's credit score. If creditors trust that you can afford your debts and make payments on time, they offer low interest rates and easy terms.
But if you keep spending beyond your means — and don't look like you can afford to make future payments — eventually they'll charge higher interest rates or limit your access to new credit.
Even before ObamaCare passed, the U.S. was spending far beyond its means.
President Obama's current budget sees deficits of at least $700 billion a year for the next 10 years and $1 trillion a year after that.
With government now on the hook for trillions more in health care spending, the question isn't whether creditors will lose patience with the U.S. but when. The consequences of such a move for the U.S. economy, in the form of much higher taxes or spending cuts, would be catastrophic.
Democrats, of course, vehemently reject the idea that ObamaCare isn't paid for.
They believe they voted for a new health care program that will not only expand coverage to millions of uninsured Americans, but will lower the deficit by $138 billion in the next 10 years, and by $1 trillion the decade after, according to the nonpartisan Congressional Budget Office.
Sadly, they're wrong. ObamaCare is riddled with budget gimmicks and flawed political assumptions that create yet another entitlement program we can't afford.
This is in part because the CBO became a pawn in Washington's political games, with Democrats brandishing the bill's price tag as if it was handed down as a footnote to the Ten Commandments.
"Those aren't my numbers," the president has said repeatedly. "They are the savings determined by the Congressional Budget Office, which is the nonpartisan, independent referee of Congress for what things cost."
The president conveniently ignored the fact that CBO estimates always come with significant caveats.
The first is that there is no surefire way to make long-term predictions about the economy, federal revenues or program costs.
The second is that Congress routinely writes legislation that looks fiscally sound and generates a good CBO score, but then votes later to overrule or water down key legislative provisions that make the original score irrelevant.
On the first count, take the Social Security program. In 2008, CBO predicted that Social Security wouldn't go into the red until 2019.
But Social Security is facing a $28 billion shortfall this year. CBO couldn't foresee the 2009 mortgage crisis, the ensuing recession, or the massive drop-off in federal revenues. Economists at the CBO know that they can't predict the future, and try to hedge their bets — picking numbers that are just as likely to be too high as too low.
But there's always a big chance that CBO estimates will be off significantly — in this case, by nine years. Policymakers should've approached CBO's estimate of health care savings with a healthy dose of skepticism.
Even if everything in the legislation is enacted as expected and remains unchanged for the next 20 years (highly unlikely), there's at least a 50-50 chance of program spending being much higher than anticipated. (Medicare and Medicaid both quickly cost much more than anticipated when they were signed into law.)
Layering a new entitlement program with essentially unknown costs on top of the two programs that are already draining the federal Treasury — Medicare and Social Security — is the height of legislative irresponsibility. ObamaCare also reached a new low in Washington's perennial budget games.
The $138 billion in estimated first-decade savings is illusory. It includes $53 billion in Social Security revenue that should go to that program, and $70 billion in premiums for a new federal long-term care program.
Counting these as health care "savings" merely generates a deficit somewhere else.
Program costs to get ObamaCare up and running — which aren't appropriated in the bill — could easily add $110 billion or more in additional spending and wipe out any remaining savings. Democrats are also desperately trying to double-count $500 billion in Medicare cuts in ObamaCare as both shoring up Medicare's long-term finances and funding a new entitlement program.
The CBO has ruled that it can only do one — not both. After ObamaCare becomes law, Democrats are expected to vote on a "doc fix" for increasing Medicare physician payments that will add another $371 billion to the price of health care reform.
When the $500 billion in Medicare cuts are added into the mix (remember, they can't be counted twice) deficit costs in the first 10 years alone could easily approach $900 billion. The president and Democrats in Congress, of course, promise to get spending under control later, perhaps through a bipartisan commission.
But the bitter partisan battle over health care — and the way that congressional Democrats and the president shut Republicans out of shaping the legislation — will have exhausted Congress and made it extraordinarily difficult for bipartisan overtures to succeed for years to come.
A week before the House voted, Moody's Investor's service warned that the U.S. credit rating was at risk from its rapidly rising debt. Sunday's vote raises the big possibility that we will experience another financial market crisis in the next few years as international creditors stop buying U.S. securities or demand much-higher interest rates.
Either outcome will have painful consequences for the U.S. in the form of higher taxes, lower employment and severe cuts to social service programs — including health care. And no CBO score Congress can gin up will ameliorate that kind of pain.
*This article originally appeared in Investor's Business Daily on April 1, 2010