As you know the US is effectively bust. There is a long list of perennial bears on the US economy who claim that commitments to future medical care costs mean the US is living off borrowed time.
They produce their calculations of woe like this. They look at how medical care costs have risen in past years (and they have shot up), and assume they will carry on rising at this rate. They then take an estimate for total expenditure over the next half a century or so, or indeed even longer, and then apply a rate of interest to calculate a net current value.
Using a formula based on those principles, last autumn Chris Cox and Bill Archer penned a piece for the ‘Wall Street Journal’ saying: “The actual liabilities of the federal government – including Social Security, medicare, and federal employees’ future retirement benefits – already exceed $86.8 trillion, or 550 per cent of US GDP.”
Dambisa Moyo wrote in her book ‘Why the West has lost: “If nothing else changes it from its current path, it is almost certain that America will move from a fully fledged capitalist society of entrepreneurs to a socialist nation within a few decades…The trouble is, it won’t be just any socialist welfare state … the US is on the path to creating the venal form of welfare state (poorly developed and designed) – one born of desperation from many years of flawed economic policies and a society that rapaciously feeds on itself.”
But supposing something else does change. Supposing the retirement age in the US rises by a couple of years, or supposing a modest consumption tax is introduced in the US, like VAT but much lower. Then the time bomb won’t so much explode as go pftt, like a damp box of fireworks on a very rainy bonfire night.
Then there are medical costs. Medical costs in the US are expensive and, apparently the whole sector is meant to be pretty inefficient.
The projections of woe assume that medical costs will carry on rising at a rate well in excess of inflation.
It’s all a little odd, because the inflation rate for US medical care costs in May was 2.2 per cent year on year, which was a fifty year low.
Pftt. Did you hear that? It was all those predictions of doom going up in smoke.
© Investment & Business News 2013