2011 January 01 Saturday
Medical Retiree Costs: Titanic Refuses Course Correction

An iceberg is looming. US Medicare spending for old folks is rising per retiree faster than the overall rate of inflation.

Even so, Medicare’s spending on physician services per beneficiary rose 61 percent, an average annual compound rate of 5.4 percent a year.

The difference between the tiny increases in physician fees and the large increase in spending on physician services reflected, of course, a sizable increase in the volume of physician services per Medicare beneficiary. It grew by 46 percent over the period, at an average annual compound rate of 4.3 percent a year.

Take that government-funded Medicare spending per person going up faster than inflation and add in a rapidly aging population. We can not afford this.

About 13 percent of the population today is 65 or older; by 2030, when the last of the baby boomers are 65, that rate will have grown to 18 percent. In addition to testing the sustainability of entitlement programs like Social Security, this wholesale redefinition of old age may also include a pervading sense that life has been what might technically be called a “bummer.”

The US government deficit is already beyond the Bernholz warning limit on fraction of spending funded by debt. Historically, countries that breach this limit suffer from hyperinflation.

In his famous book, Monetary Regimes and Inflation: History, Economic and Political Relationships,  Bernholz demonstrated that hyperinflations resulted whenever 40 per cent or more of government expenditures were financed by money creation (resort to the printing press). In 2009, approximately 42 per cent of US government expenditures were financed by some form of credit.  So the prospect of hyperinflation, however remote that may appear to be at the present time, cannot be ignored.

We aren't going to soon do a combination of large tax increases and large spending cuts to bring sanity to the US government's books. The best bet is on continued massive fiscal irresponsibility. We are not even lucky enough for this to be the only thing going wrong on an epic scale in America.

Imagine you were on the bridge of the Titanic and an iceberg was spotted with enough time to avoid it. But the captain, crew, and passengers said "It will cause us too many inconveniences to change course and our ship can plow right thru that iceberg and keep going". That's America.

Share |      By Randall Parker at 2011 January 01 09:08 PM  Economics Sovereign Crises


Comments
Mthson said at January 2, 2011 2:36 AM:

Fascinating Steve Sailer article. Thanks for linking.

Why aren't conservative activists like the billionaire Koch brothers bankrolling Sailer?


In case it's useful to anyone, this is some of the careful language I used in describing the article to a liberal friend, with positive results:

This chart seems to suggest US schools are virtually the best in the world when scores are broken down and compared to the countries the Americans' ancestors came from: http://www.vdare.com/images/121910_ss001c.png .
(Source: http://www.vdare.com/sailer/101219_pisa.htm)

In that regard, there are only 2 districts in the world that outperform the US: 1. Finland, and 2. Shanghai.

If we were to look at this from the skeptical side, we would get ammunition from that this is a controversial site. However, 1. being controversial isn't the same as being wrong, 2. many highly intelligent people respect the author, and 3. it seems reasonable to say casting doubt on the numbers themselves, if that's possible, is probably the safest way to know we're thinking scientifically.

Caveat: I've only skimmed over the article, so there are likely points with which I don't agree.

sabril said at January 2, 2011 10:24 AM:

I'm not an economist, but I would guess that if they raise the retirement age from 65 to 70 and slash benefits for retirees with decent assets/income, they can close the gap no problem. People will bitch and moan, but the system won't collapse.

As far as hyperinflation goes, I would be very surprised if current deficit spending was greater now than between 1940 and 1945.

bbartlog said at January 2, 2011 11:46 AM:

'40 per cent or more of government expenditures were financed by money creation[...] approximately 42 per cent of US government expenditures were financed by some form of credit.'

Not the same thing at all. Credit means bonds means someone presumably believes that your government can repay the debt it is incurring. That's not printing money, and has no particular inflation implications. Now, as it happens, I think it's quite clear that the Fed *has* been printing money (that's what those loans to BoA and other were), and that this money has been financing deficit spending indirectly; however, of the $4 trillion or so (my estimate) they printed up in 2010, only a third went to buy and/or prop up US Treasury bonds. So we're still below this Bernholz limit, maybe around 30%. But fundamentally, I don't see why you would want to focus on some particular number when you can look at the overall picture and reach the same conclusion.
Anyway, the inflation situation is kind of sui generis because we have never seen a currency that was the de facto world reserve currency inflated in this way. I think that the sheer number of dollars and dollar-denominated instruments will slow the impact somewhat; of course as with bubble phenomena generally, it may just instill false confidence in participants and thus lead to a more profound catastrophe, as Bernanke and co. come to believe that they can print dollars without consequence.

bbartlog said at January 2, 2011 11:51 AM:

'As far as hyperinflation goes, I would be very surprised if current deficit spending was greater now than between 1940 and 1945.'

Between 1940 and 1945, the government played it straight and actually got real people to buy war bonds; the debt they incurred was held largely by the American people. I would have to research the activities of the Fed at that time if I wanted to say definitely that they didn't print money, but I believe that the money supply was stable. Like Randall, you are conflating government debt with actual increases in the money supply. While government debt is certainly a problem, leading to things like austerity programs and higher taxes, it does not (in fact, can't) lead to hyperinflation so long as the government can't print up more money.

sabril said at January 2, 2011 3:35 PM:

"the debt they incurred was held largely by the American people."

Again, I am not an economist, but it seems to me that this sort of borrowing has the effect of increasing the money supply. Let's do a thought experiment:

John has $1,000,000 stuffed in his bedsheets. His net worth is $1,000,000. Susan has no money at all. Her net worth is zero.

Next, John buys $100,000 in savings bonds. The government gives the $100,000 to Susan to dig a big ditch in the ground. Susan's net worth is now $100,000. John's net worth is still $1,000,000 since he has $100,000 in bonds and $900,000 in cash. He is perfectly free to sell the bonds; borrow against them; trade them; and otherwise use them like money. In any event, he still has $900,000 in cash to throw around. One can expect that this transaction will result in inflation if John and Susan are both bidding on the same goods and services.

Anyway, please feel free to correct me.

no said at January 2, 2011 5:53 PM:

thats a strawman sabril. The reality is that people don't have money under their beds, they have money either invested directly, or in a bank. If the government takes the $100,000 and uses that money in a wasteful maner, the economy would have been better off if someone more efficient had allocated the money to something more useful.

Besides, if John buys a bond, he will want a return on his money, maybe 5% or more, so for it to be a net positive transaction the government would have to use the money in a way that returns a value at least 5% on the money it has borrowed, otherwise the government loses.

The problem is we are not starting from scratch, we in the West are coming from the position where we had very good economies compared to the rest of the world in the relatively recent past. Our spending is based on that level of economic strength, even if we were able to do a lot to remain strong, if its not quite as good as it was before, which I don't think it will be, we still need to reduce spending significently to balance the budget.

sabril said at January 2, 2011 6:47 PM:

"thats a strawman sabril. The reality is that people don't have money under their beds, they have money either invested directly, or in a bank"

It seems to me the same principle would apply. For example, suppose Johnny has $900,000 in stock and $100,000 in the bank; Charlie has $200,000 in the bank; and Susan has zero. So their net worths are $1m; $200k; and zero respectively.

Next, Johnny sells $100k in stock to Charlie and uses the money to buy $100k in bonds. The 100k from the bonds is given to Susan to dig a ditch.

After that, their net worths are $1m; $200k; and $100k. However the total amount of wealth in the world is unchanged. Again, it seems to me that this would be inflationary.

"If the government takes the $100,000 and uses that money in a wasteful maner, the economy would have been better off if someone more efficient had allocated the money to something more useful."

I agree, but how does this contradict my point? I'm simply arguing that government borrowing is inflationary just like government printing of money is inflationary.

"Besides, if John buys a bond, he will want a return on his money, maybe 5% or more, so for it to be a net positive transaction the government would have to use the money in a way that returns a value at least 5% on the money it has borrowed, otherwise the government loses."

Again, so what? Governments aren't in business to make money.

bbartlog said at January 2, 2011 7:01 PM:

sabril -
you do provide a good example: once a debt is packaged up in such a way that it becomes a monetary instrument (in your example, a bond), it could be construed as adding to the money supply, depending on your definition of same. There are different measures of money supply, some narrow and some broad (the wikipedia article on money supply gives a good overview of the complications). In general, the fact that someone (in this case the government) has a debt obligation that mirrors the entitlement the bondholder has means that most measures of money supply don't count the bond as money. But there are heterodox economists who would consider the creation of just such debts to be the principal mechanism by which the effective money supply grows. I think Steve Keen takes a stance something like this. Certainly the deflationary phenomena that accompany a crash can be better understood by looking at the contraction of money *including credit instruments*. Contraction in narrow measures of money can't explain the price deflation that occurred during the Great Depression, for example.
Practically speaking, however, government bonds are not a good enough substitute for actual cash that I would consider federal deficit spending (financed by real bond buyers) to be equivalent to federal deficit spending (financed by straw buyers who have been lent cash at 0% by the Fed). In the former case, someone has to trade actual cash in large amounts for the bonds, and the velocity of the new 'money' (if we want to classify bonds as such) is not going to be large.
To rework your example, the current situation is as if the Fed had loaned John $100,000 (newly received from the Treasury) on the condition that he use it all to buy bonds (the rest transpiring just as in your example). In this situation, John is still worth a cool million (his obligations to the Fed match his bondholdings... though there are dangerous wrinkles there...), but he has $1.1 million in liquid assets - his cash plus his bondholdings. Susan has the extra $100,000 just as you describe. Thus even if we concede that the situation you describe might be inflationary (though history seems to say in the long run it's not... so long as the bonds get paid), the money-printing variation would be clearly even more inflationary.

no said at January 3, 2011 10:32 AM:

But it does make a difference what is done with the borrowed money as to whether its inflationary or not. The reason it seems inflationary to you is you are paying someone $100,000 to dig a fkin ditch..
If someone is adding value to the economy by as much or more than than the value of the new money then its not inflationary.
What causes inflation is when more money is added without anything to show for it in reality. So you have more money chasing the same amount of products/assets.

Governments may not make money in the private sector sense, but they do add value. Until they become too big that is.
There are a lot of valuable things that only governments usually can do, ofcourse I know libertarians would say that government is not needed, but theory and practise are two different things.
For example the population explosions in the 18th century Europe were partly a result of government clean water and sewerage systems, (not necessarily central government).

no i don't said at January 3, 2011 5:54 PM:

Unfortunately, the American political process is among the most corrupt in the world. In every country on earth, one expects politicians to take bribes from the rich. But this generally happens in secret, behind the closed doors of their elite clubs. In the United States, this sort of political corruption is done in broad daylight, as part of legal, accepted, standard operating procedure. In the United States, they merely call these bribes campaign donations, political action committees and lobbyists.
One can no more expect the politicians to change this system than one can expect a man to take an axe and chop his own legs out from underneath him.

No, the United States of America is not going to change for the better. The only change will be for the worse. As we speak, the economic system that sustained the country during the post-war years is collapsing. The United States maxed out its "credit card" sometime in 2008 and now its lenders, starting with China, are in the process of laying the foundations for a new monetary system to replace the Anglo-American "petro-dollar" system. As soon as there is a viable alternative to the US dollar, the greenback will sink like a stone.

no i don't said at January 3, 2011 5:57 PM:

There are only two possible futures facing the United States, and neither one is pretty. The best case is a slow but orderly decline - essentially a continuation of what's been happening for the last two decades. Wages will drop, unemployment will rise, Medicare and Social Security benefits will be slashed, the currency will decline in value, and the disparity of wealth will spiral out of control until the United States starts to resemble Mexico or the Philippines - tiny islands of wealth surrounded by great poverty (the country is already halfway there).

Equally likely is a sudden collapse, perhaps brought about by a rapid flight from the US dollar by creditor nations like China, Japan, Korea and the OPEC nations. A related possibility would be a default by the United States government on its vast debt. One look at the financial balance sheet of the US government should convince you how likely this is: governmental spending is skyrocketing and tax receipts are plummeting - something has to give.

no i don't said at January 3, 2011 5:59 PM:

Whether the collapse is gradual or gut-wrenchingly sudden, the results will be chaos, civil strife and fascism. Let's face it: the United States is like the former Yugoslavia - a collection of mutually antagonistic cultures united in name only. You've got your own version of the Taliban: right-wing Christian fundamentalists who actively loathe the idea of secular Constitutional government. You've got a vast intellectual underclass that has spent the last few decades soaking up Fox News and talk radio propaganda, eager to blame the collapse on Democrats, gays and immigrants. You've got a ruthless ownership class that will use all the means at its disposal to protect its wealth from the starving masses.

On top of all that you've got vast factory farms, sprawling suburbs and a truck-based shipping system, all of it entirely dependent on oil that is about to become completely unaffordable. And you've got guns. Lots of guns. In short: the United States is about to become a very unwholesome place to be.

no i don't said at January 3, 2011 6:00 PM:

Right now, the government is building fences and walls along its northern and southern borders. Right now, the government is working on a national ID system (soon to be fitted with biometric features). Right now, the government is building a surveillance state so extensive that they will be able to follow your every move, online, in the street and across borders.

If you think this is just to protect you from "terrorists," then you're sadly mistaken. They don't want their tax base escaping. They don't want their "recruits" escaping. They don't want YOU escaping.
This country started with slaves on plantations - this is how it is going to end. They will not be bringing slaves in, though. They already have them.

-Based on the article by Lance Freeman-

Double Ought said at January 3, 2011 7:48 PM:

"And you've got guns. Lots of guns."

Damned right we do. Lots of blacks around. They'll eat liberal 'tards like you real easy. Good luck to you. You're gonna need it.

Rohan Swee said at January 5, 2011 9:50 AM:

Imagine you were on the bridge of the Titanic and an iceberg was spotted with enough time to avoid it. But the captain, crew, and passengers said "It will cause us too many inconveniences to change course and our ship can plow right thru that iceberg and keep going". That's America.

Well put. Nice metaphor.

no I don't: Whether the collapse is gradual or gut-wrenchingly sudden, the results will be chaos, civil strife and fascism. Let's face it: the United States is like the former Yugoslavia - a collection of mutually antagonistic cultures united in name only. You've got your own version of the Taliban: right-wing Christian fundamentalists who actively loathe the idea of secular Constitutional government[...]

Where are all these "right-wing Christian fundamentalists who actively loathe the idea of secular Constitutional government"? Oh yeah, I forgot the "Christian Reconstructionists". All six of 'em.

[...]You've got a vast intellectual underclass that has spent the last few decades soaking up Fox News and talk radio propaganda[...]

The black and Hispanic members of the vast intellectual underclass pay no attention to either. The white members are watching reality TV, not Rush and newzak. They'll get violent if they get hungry, not because of subliminal mind-control signals from programs they've never listened to.

[...]eager to blame the collapse on Democrats, gays and immigrants.[...]

I never met anybody who blames economic problems on gays. Democrats and lunatic immigration non-policies, yes, with sound reason. They err only in (sometimes) leaving out the Republicans.

You've got a ruthless ownership class that will use all the means at its disposal to protect its wealth from the starving masses.

So why are you bitching about our guns? You think only the fat cats should have the means to defend themselves? (Oh. Sorry. I guess in the "ruthless ownership class" you'd include anybody who's worked and saved himself into modest positive net worth, lol.)

[...]a truck-based shipping system[...]

Just to pick a nit, U.S. shipping, iianm, is more rail- than truck-based (unlike, say, Europe). Not that this wouldn't be affected by fuel costs, or that food distribution isn't heavily truck-dependent.

no i don't said at January 6, 2011 11:12 AM:

"Damned right we do. Lots of blacks around. They'll eat liberal 'tards like you real easy. Good luck to you. You're gonna need it."

So all blacks are conservative according to you... Ha, ha, ha. Try to cut down on so much mcdonal's and coca-cola man. All I can say to your idiocies -since you're incapable of a full coherent idea- is:

I rest my case.

Explaining things is a little more difficult; it implies mental order and certain knowledge of things, not just undirected, unreleased and accumulated hate like the one you got burning up your ass.

no i don't said at January 6, 2011 11:21 AM:

Rohan Swee,

Interesting, brilliant(?) fencing. Perhaps you'd like to type your arguments on some of the causes of the mess the country is in... I mean it's easy to critizice and say "that's baaaaaad".

Please, please, consider this only as an invitation, -not a dare-, cause there are to many chaste sensitivities around this blog.


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