Postscript on US red ink

The fiscal threat confronting the United States stems from the reality that US federal debt will rise from about $11 trillion to over $20 trillion between 2009 and 2019, and then by an additional $55 trillion of unfunded entitlement liabilities between 2019 and 2070. As the author has written elsewhere, the Social Security deficit of some $18 billion can be driven to zero, assuming that the effective retirement age rises to 70. This is likely to happen by choice as more and more workers realize that they will have to work longer to enjoy the retirement they want.

The Medicare and Medicaid deficits of some $40 trillion can be reduced by over 50 percent should policy makers come to understand and apply the following theorem in microeconomics: For any outward shift α in the demand curve for medical services (a shift corresponding to greater access to health care due to subsidized insurance and to a growing number of elderly people), there exists a real number β > α such that, if the supply curve shifts outward by the magnitude β, then the total cost of medical care as a share of GDP (currently 17 percent) will not rise at all, and can even fall. The tragedy of “Obama-care” is that it flies in the face of this logic by shifting the supply curve backwards (e.g., by paying doctors ever less and thus driving them out of the business). The result will be soaring total costs and quantity rationing.

What policy makers ought to do is apply the logic of the above theorem, and shift the supply curve way out: (1) by deregulating the industry that is at present like a medieval guild (e.g., remove outdated “ceilings” on the number of medical school students), and (2) by encouraging sharply increased productivity growth (e.g., install low-cost but highly intelligent expert systems operating 24/7/365 in every pharmacy so as to obviate costly and time-consuming visits to doctors in the case of routine ailments). Incidentally, it is precisely this logic at work that explains why the share of national income that goes to most products and services (e.g., food and clothing) has decreased over the past century—the true meaning of rising living standards. Why should health care be any different, accounting for an ever-larger share of income that imperils the fiscal integrity of the United States?