Those of us who know that long-run fiscal imbalances are likely to end in disaster -- high inflation, deep recession, financial crisis, or all three -- scratch our heads in bemusement at the priorities of George W. Bush and his administration. The Social Security "crisis" that he wants to spend his political capital on "resolving" ranks no higher than third among America's fiscal problems in urgency and seriousness -- and at a time when these problems have grown into a profound threat to global economic stability.
America's gravest fiscal problem is the short- and medium-run deficit between tax revenues and spending. This deficit is entirely of Bush's own creation, having enacted -- and now seeking to extend -- tax cuts that are not cuts at all, because they merely shift the burden of fiscal consolidation onto future generations.
The second most serious problem is the looming long-term explosion in the costs of America's healthcare programs. This is also partly Bush's doing, or, rather, not doing, as his first-term policy on health spending was to do virtually nothing to encourage efficiency and cost containment. Instead, he enacted a Medicare drug benefit that promises to spend enormous amounts of money for surprisingly little in the way of better healthcare.
Surely a more competent administration would be worried about addressing these more severe and urgent fiscal problems. Let's pretend that the United States had such a government. What would it do?
Dealing with the short- and medium-run deficit would be fairly straightforward: decide how large a share of GDP the federal government should take up, set spending at that level, and set taxes so that the budget is balanced (or so that the debt-to-GDP ratio is not growing) over the business cycle. Determine whether, overall, you would rather have in the medium term a federal government that spends, say, 16 percent, 20 percent, or 24 percent of GDP -- and on what.
What is not straightforward is how to address the imminent explosion of healthcare costs. In fact, projections of rapidly rising Medicare and Medicaid spending in the US -- and similarly rapidly-rising governmental healthcare expenditures elsewhere in the developed world -- are not so such a problem to be solved as the side effects of an opportunity to be grasped.
The opportunity stems from the fact that our doctors and nurses, our pharmacists and drug researchers, our biologists and biochemists are learning to do wonderful things. Many of these things are, and will be, expensive. Many of them will also be desirable: longer, healthier, and higher quality lives as we learn more about the details of human biology. Federal healthcare spending will grow very rapidly over the next two generations because the things that healthcare money will be spent on will be increasingly wonderful, and increasingly valued.
But it will be difficult to grasp fully this opportunity. It is highly likely that desired health expenditures will be enormous for some things and trivial for others. This calls for insurance. The problem is that private insurance markets do not work well when the buyer knows much more about what is being insured than the seller. Obviously, one's health is an area in which private information can be very private indeed.
This is, of course, why state-run healthcare systems came into being. But replacing private insurance with public insurance has its own problems: consider the parlous circumstances in which Britain's National Health System finds itself, the result of generations of politically driven underinvestment in healthcare.