Debt Digest | Cheap Money, Steep Costs
Links & Fiscal Facts
Here are this week’s reading links and fiscal facts.
Private vs. government-run health plans. A Harvard-Inovalon Medicare study found that Medicare Advantage (MA), which uses private insurers, has “substantially lower utilization and expenditures” compared to traditional Medicare Fee-for-Service (FFS). MA has “comparable amounts of primary and routine care relative to FFS,” but lower overall health care costs—about 12 percent lower under MA than FFS. Medicare’s current structure “tilts the playing field toward excessive coverage and tilts the field against high‐quality coverage” argues Cato’s Michael Cannon. He recommends “applying traditionally Democratic ‘public option’ principles to the program, such that traditional Medicare and private insurers compete on as level a playing field as possible.”
Health care cost-savings. CBO analysis suggests that many health care cost-saving efforts thus far failed to achieve significant savings. The Center for Medicare & Medicaid Innovation, which conducts pilot programs to test new ways to deliver and pay for government health care, spent “$7.9 billion to operate models, and those models reduced spending on health care benefits by $2.6 billion.” Minor tweaks to health care delivery are unlikely to achieve major cost savings. Instead, Cannon recommends “limiting per-enrollee Medicare spending to gross domestic product growth” and “freezing federal Medicaid and CHIP spending at current levels.”
Costly health insurance subsidies. According to the Congressional Budget Office (CBO), “In 2023, federal subsidies for health insurance minus certain related payments made to the federal government are estimated to be $1.8 trillion, or 7.0 percent of gross domestic product (GDP). In CBO and JCT’s [Joint Committee on Taxation] projections, those net subsidies grow substantially, reaching $3.3 trillion, or 8.3 percent of GDP, in 2033.” Between 2024 and 2033, the federal government will spend $25 trillion on health insurance subsidies. That’s more than double what the U.S. will spend on defense over the same period.
Social Security Trustees underestimate retirement income adequacy. Andrew Biggs of the American Enterprise Institute writes, “For a worker who earned the age-adjusted average wage, Social Security replaces about 54 percent of the final 35 years of inflation-adjusted earnings, a roughly one-quarter increase relative to the [Social Security Administration’s] figures.” One key takeaway: “If retirees are instead assumed to desire an income that allows for a similar standard of living of living that they enjoyed prior to retirement, a standard that is more consistent with financial planning and the life cycle hypothesis in economics, retirement income adequacy is found to improve in future decades.”
The illusion of cheap money. The Committee for a Responsible Federal Budget estimates that “nearly 60 percent of our debt originated when the average interest rate on ten-year Treasury notes was less than 3 percent…While there was certainly a logic to borrowing while interest rates were low, we warned at the time that this tactic would only work if there were a plan to pay back the debt before interest rates rose. Absent such a plan, low-rate debt would inevitably roll over to high-rate debt. Unfortunately, policymakers took to heart the idea of borrowing while rates were low without considering the rollover risk.” With more than half of all debt maturing in the next three years, interest costs “could become the single largest government program in just two decades.”
Lessons on deficit reduction. Cato’s Adam Michel writes, “Rising bond yields make borrowing more expensive for the federal government and increases the likelihood of a fiscal crisis…Today’s rising interest rates are a warning to Congress: get your fiscal house in order to avoid a crisis. Past fiscal adjustments provide another warning: relying on tax increases to fix budget problems is a recipe to make things worse, not better.”
Biden announces $9 billion in student loan forgiveness. The administration’s new scheme forgives $9 billion for 125,000 student borrowers. That’s an average of $72,000 per borrower. Douglas Holtz-Eakin of the American Action Forum argues, “[T]his does nothing to make college more affordable; if anything, it provides colleges and universities the ability to raise their tuition. And, because it is backward looking, it does nothing to bring the promise of higher education in reach for more Americans.”
Agencies wasted billions on furniture. Adam Andrzejewski reports, federal agencies spent $3.3 billion on furniture between 2020 and 2022. During much of that period, office space was shuttered, and employees were paid to work from home. Why were agencies splurging on furniture? Federal impoundment control is one explanation for this wasteful spending. As Kurt Couchman writes, “The Impoundment Control Act requires agencies to spend all funds provided by Congress, even if they don’t need all the money to do their jobs. Agencies scrambling to spend can make bad choices while wasting money and growing the debt.”
Federal vs. state & local debt. Cato’s Chris Edwards explains, “Federal debt held by the public of $28.5 trillion is eight times larger than the combined debt of all state and local governments of $3.3 trillion. Not only is state and local debt much smaller, but the states have more justification for accumulating debt than the federal government. That is because a larger share of state‐local spending is for capital investment, which is partly financed by debt…By contrast, federal debt generally funds consumption—such as entitlement programs—not capital investment…The chart below compares federal debt as a percent of U.S. gross domestic product to the state‐local debt of each state as a percent of state GDP.”
