2008 October 12 Sunday
Financial Crisis Costs Low Compared To Retiring Baby Boomers

Writing in the New York Times David Leonhardt says while the US budget deficit is ballooning that's nothing compared to the medical costs of retiring Baby Boomers.

Even before the crisis, the Bush administration was set to bequeath a $550 billion deficit to its successor. Now, a better estimate appears to be $750 billion — or 5 percent of gross domestic product. The only years since the 1960s that the deficit has been nearly so large were the early 1990s (almost 4.5 percent of G.D.P.) and the mid-1980s (with a peak of 6 percent in 1983).

Obviously, next year’s deficit is a problem. And if you assume the credit crisis isn’t about to lift — which seems smart at this point — the ultimate cost of the bailouts could conceivably go higher. Whatever the final figure, it should still be put in some context.

Despite everything, the biggest fiscal problem remains, far and away, health care. Based on the rate that medical spending has been rising, the Congressional Budget Office forecasts that Medicare and Medicaid will take up 10 percent of G.D.P. within two decades, up from about 4 percent now. In today’s terms, that would be the equivalent of adding at least $900 billion to the deficit every single year, in perpetuity. It makes the cost of the bailouts look like a rounding error.

Figures like $700 to buy securities in this financial crisis do not represent long term costs. The numbers being bandied about are for costs of buying securities which, in some cases, will have higher resale value in a few years. Whether the bailout becomes a net cost to taxpayers still remains to be seen. What is costing the taxpayers is the recession that the bursting bubble has caused.

The recession and financial crisis make me wonder about our ability to handle Peak Oil. Once world oil production starts declining 5% per year the costs of that will far exceed the effects of the housing bubble which caused the current financial crisis. That oil production decline will come on top of the huge surge in medical costs for retired Baby Boomers.

It gets worse. The younger generation includes a much larger fraction of low performing Hispanics. A group with poor academic performance, lower wage performance, and higher crime and illegitimacy isn't going to pay the taxes which the retiring white middle class paid.

Even worse, the US is running a trade deficit of about 5%. So we are living beyond our means and need to cut our living standards at least 5% just to start living within our means.

Combine an aging and less able population, Peak Oil, and the lingering effects of the current financial crisis and the 2010s do not look pretty.

Share |      By Randall Parker at 2008 October 12 12:25 PM  Economics Government Costs


Comments
Ned said at October 13, 2008 5:49 AM:

National debt as a percentage of GDP was 110% at the end of World War II and dropped pretty evenly until the end of the Carter administration, when it bottomed at around 33%. It rose sharply through the Reagan, Bush I and early Clinton years, dropped after the Republicans took over Congress in 1995 and clamped down on spending and then began a sharp increase under Bush II, reaching almost 70% currently. Further increases are guaranteed.

We got a little taste of what the future looks like earlier this year, when Congress blocked a scheduled Medicare fee cut to physicians and replaced it with a small increase. Fee cuts mean that fewer physicians will accept Medicare patients, creating access problems. Since Congress hates to raise taxes or cut benefits (which is what a physician fee cut amounts to), they will always choose to just borrow some more to keep everyone happy. But these chickens are going to come home to roost - the 2010's don't look pretty, and the 2020's look worse.


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