Our long term financial problems

There is a growing belief among serious economists that we, as a country, face a large and unsustainable gap between our financial resources and our financial expectations. Current deficit spending by the national government and a failure to control long term debt, pension and health care costs at all levels of government will lead to financial reckoning at some point which may be very painful — sudden cuts in living standards for many Americans, leading to social upheaval like we have seen in Greece recently.

Some continue to argue for short term stimulus — running a deficit to stimulate the economy. Others believe that our current deficits add to our future pain. Few doubt the need to control health care costs.

I receive links and comments from constituents on this larger picture from time to time and I’m going to start collecting the links here for reference. I hope that people will free to chime and add information on these issues any time by commenting.

U.S. Is Bankrupt and We Don’t Even Know: Laurence Kotlikoff
BTG Research Comments on recent Fed Policy moves
Rolling Stone on the Wall Street Reforms
High public compensation costs.
Public pension costs

Published by Will Brownsberger

Will Brownsberger is State Senator from the Second Suffolk and Middlesex District.

15 replies on “Our long term financial problems”

  1. Will, the economists I read (Brad Delong, Paul Krugman) say the following:

    1) the Bush tax cuts are not sustainable, they must expire on schedule, certainly the ones for higher-income earners;

    2) the Obama health care bill does a lot to improve our long-term deficit numbers (we would be in even better shape with a “more liberal” health care plan, meaning single-payer or single-provider, because those are generally more efficient, but that was apparently not politically possible, even though it polled quite well on a national level);

    3) that we should spend now to get the economy growing again, and they point to the history of the Depression as an example to bolster their macroeconomics theories. In particular, that an attempt to cut the deficit in 1937 lead to a downturn, and that what really got rid of the depression was WW2 levels of spending — till then, we were too timid to spend enough. And note, too, that war spending is the LEAST useful spending; equipment is built and destroyed, people are trained only to be soldiers (not a productive activity), and many of those soldiers are killed. Imagine spending at that level, in useful, productive ways.

    Note, too, that Delong and Krugman have been consistently saying these things ever since the beginning of our current economic crunch, and they have correctly predicted patterns in interest rates and weak inflation (contrary to the so-called deficit hawks) so I am inclined to believe them.

    Again — the guys who have the vapors about our long-term deficit and claim we should cut spending now (but oddly enough, not raise taxes), are generally the same guys who predicted that our government would be unable to borrow money at good rates, and they have been proven wrong. I prefer to listen to people who make predictions that turn out right.

    I think the comparison to Greece is not a good one. Greece does not control their currency because they are in the EU. This means that they cannot inflate away their debt. We, on the other hand, control our currency pretty well, and we could inflate away some of our debt if we wanted to (the dose makes the poison, obviously, but the federal reserve does have a larger-than-zero inflation target, and one of the purposes of inflation is to create a little ambient risk-of-loss to persuade people to invest).

    1. It would be nice if there were consensus among the experts on the fundamental economics issues. Stimulus vs. deficit control is a decision that the president and congress have to make without consensus guidance.

      But at the state and local level, although I’m listening hard, so far I don’t hear any economists arguing that we shouldn’t be worried about the costs of health care, pensions and high debt service. Economists seem to agree that we need to very concerned about the mismatch between our revenues and long term liabilities.

      1. Will, I think some economists are just plain shills. The so-called freshwater crowd is unable to explain the existence of the crash, yet they think they are qualified to treat it. No way — if someone’s going to claim that their advice is informed by a beautiful theory, but the beautiful theory is unable to explain reality, I’m going to ignore the advice.

        The tell, for me, is that the so-called “deficit hawks” focus entirely on cutting spending, instead of on raising taxes, and even propose to cut taxes. You are too diplomatic, and perhaps you must be, but most of them are flat lying about what they are and what their purpose is. It’s the drown-government-in-a-bathtub guys, same goal, new schtick. I see no reason to seek consensus with these guys.

        1. Certainly, some are shills (and some are just nuts). But I think there are plenty of serious people who don’t completely agree with Krugman. It’s a hard set of issues and most of us aren’t quite sure who to believe.

      2. re:
        DavidChase – August 13, 2010 at 2:31 pm
        Will Brownsberger – August 13, 2010 at 3:42 pm

        David, I agree with you about the Greece comparison being faulty because of the Euro. Unfortunately, it’s a more appropriate analogy for state and local deficits, as Will alluded to. I think anybody in the MBTA would be happy to share his or her opinion on debt loads at the state level.

        For future recessions, it seems that prohibitively large interest payments could be avoided or reduced by running larger surpluses during growth. That’s a difficult sell, but I suspect the net effect would be positive since people usually place more value on limiting bad outcomes than they do on improving ones that are already ok.

  2. Here’s an email that members of the Consumers Union have been sending to me and other legislators:

    ======================================================

    It’s time our state gets serious about protecting residents from
    outrageous health insurance rate hikes that put decent coverage out of
    reach for many. I urge you to publicly examine the surplus profits of
    health insurers operating in our state, and make sure they are not
    taking advantage of residents by squirreling away huge amounts of
    surplus profits while continually raising our rates.

    I am forwarding you a new report from Consumers Union, the nonprofit
    publisher of Consumer Reports, that found nonprofit Blue Cross Blue
    Shield plans pocketed more than $32 billion in surplus profits during
    the past decade. Some of these plans hold up to seven times the minimum
    regulators say is needed — while hiking some customers’ rates up to 20
    percent each year.

    You can read the report here at http://cu.convio.net/SurplusReport.

    The 10 nonprofit Blue plans that Consumers Union studied had $4.61
    billion in surplus in 2001. By last year, that surplus had grown to
    about $9 billion. The study describes how these surplus profits have a
    direct impact on customers’ wallets. Even if insurers have plenty of
    surplus, they may still try to build more with our premium dollars.

    These kind of surplus profits aren’t unique to Blue Cross Blue Shield
    plans. Despite big profit cushions, health insurance companies keep
    asking state insurance commissioners to charge us higher and higher
    premiums.

    State insurance commissioners have the ability to examine the surplus
    profits of insurance companies operating here. I urge you to hold a
    public hearing when insurers try to raise insurance premiums, so we can
    see how much surplus insurers in our state have collected, and whether
    these rate hikes are justified. It’s critical that this information be
    made public so rate hikes can be rejected if they’re not needed!

    If insurance companies are holding surplus profits that aren’t needed
    for financial protection, then the funds should be returned to
    customers, or at the very least, be used to hold down rate hikes.

    The new health reform law also sets out a fair and reasonable
    medical-loss ratio to ensure the bulk of my premium dollars are going
    to my health care, and not marketing, overhead and profit. I also urge
    the state Insurance Commissioner to support this ratio (85 percent for
    group policies; 80 percent for individual policies) and not allow any
    weakening of it. Our state should do all it can to prevent insurers
    from gaming the system by simply reclassifying administrative or
    overhead expenses as health care expenses.

    Rising insurance costs are one of the biggest burdens on residents in
    our state. Please read this new report here at
    http://cu.convio.net/SurplusReport, and if you have more questions,
    contact Blake Hutson at Consumers Union at [email protected].

    Please take the necessary action to reject rate hikes for any insurer
    in our state that has more surplus profit than is needed for solvency
    protection.

    1. My response to this email is:

      Thanks for being in touch about health care insurance costs. Clearly, controlling these costs has to be one of our highest priorities.

      I believe that this is partly an insurance issue, but also an issue of provider payments.

      We have to look at what the insurers are making, but we also have to look at what the hospitals, doctors, device manufacturers, etc. are making.

      I was disappointed that we spent so much time on the casino issue this year. We would have done more for the state if we had focused on health insurance and provider payment reform. We didn’t ignore those issues, but the cost control measures that we passed were relatively modest.

      Let’s hope that we can get further next year.

      1. Will-Long time no talk. Congrats on your victory!

        Thanks for being so thoughtful about the health insurance cost debate. People need to do a better job connecting the dots before they assign responsibility as to who is to blame for the skyrocketing costs. 28 years ago I was treated for a broken thumb at Sancta Maria Hospital in Cambridge. When I questioned the Dr.’s office about the bill I was told by the office administrator- “why do you care what was charged-insurance will pay for it”…I think this story serves as a reminder that when someone else is picking up the tab-people don’t care as much. I would recommend gov’t reduce the # of mandates. Is it true that Insurance Companies must pick up the cost for invitro fertilization? If that is so, should we be surprised that Octo-Mom resulted?

        1. Hey Spencer,

          Good to hear from you!

          I agree that the insured fee-for-service is a big part of the problem. The main idea circulating now is “global budgeting”, so that doctors have less incentive to overtreat — but hopefully, still have the professionalism and the resources to treat enough. We’ll see if we can make progress on that this year!

          /w.

  3. David… let’s see what happens come November. I suspect your views represent the minority.
    Will… Good to see you are cognizant that the majority of economists tend to view our Government as unsustainable. Funny that we jail Bernie Madoff for his ponzi scheme but when you look at the US Government, Social Security, and Government pension plans they are basically in the same boat just on a larger scale.

  4. Call me a deep thinker if you will. But to me: We are at a crossroads in history. Although it may not seem like it, our economy, indeed our entire culture, is being heavily affected by world population. Between 1960 and 1999 we doubled from 3 to 6 Billion people. Now, we’re close to 7 Billion. All those people may seem very far away to us, but their very existence impacts us daily, without our being aware of it. These people need meaningful work, use up resources, cause pollution, sometimes fight to get their needs met, suffer from diseases we don’t know how to cure, and are subject to natural catastrophes (the floods in pakistan, equal to 10 Hurricane Katrinas! for example). All this has a huge impact on us, regardless of which of our quaint political parties here in the USA is in power at any given moment.
    Add to this the incredible revolution in information technology we’re living with right now. We’re just starting to be aware of what I call an ‘ecology of the mind’ where we discover that our brains need a balanced diet of stimulation and ‘boredom’ in order to function well. Too much of one or too much of the other causes imbalances within us. Just seeing trees and nature on a daily basis (just driving by them on your commute) improves health, both mental and physical.
    I could go on.
    The point is, it’s time to open up our questions about the economy to new and bolder ones. We’re taking ourselves and our economy on a trip where we’ve never been before. We need completely new visions to guide us.
    Look, we’ve had an economy that’s rewarded those who divorced spirit, heart, and love, from the process of making money. So trashing other people and trashing nature (living and non-living things) has reached levels never before seen.
    I don’t want this economy to recover! I don’t want to go back to a bigger flood of cheap throw-away products and masses of cheap junk food and other wasteful ways, all of which hurt us and hurt the land as well.
    Instead, I want to continue working on making a new economy for ourselves. I can’t tell you what it looks like, exactly, but I can tell you that it involves a more direct personal connection with each other and our sources of food, water, energy, etc., more calmness, more tolerance and even love of our different cultures, different aspirations and talents, etc.
    So, I invite you to respond to this issue with how you’e like to live, what would genuinely feel good to you, not just what you want other people or corporations or ‘the government’ to do “about the economy.”

  5. Thanks, Glenn. I’ll call you a deep thinker and that is a compliment.

    I do think we are at a point in history where new models and new orders (or disorders) are emerging. We can only see it dimly. A couple of hundred years hence, when people look back and see the changes as obvious and inevitable, they will also write about the mind struggle we are going through now to try to dope out what is happening.

    We do want the economy to recover — there are people who can’t make ends meet. But you are right to push the dialog about what is important to us and what kind of economy we want in the long run. Each of us has choices to make on that spiritual level.

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