Category: Policy

What Percentage of US Healthcare Is Publicly Financed?

Public, taxpayer-funded health care spending will pay for for 53% of US health care in 2009. If health care tax breaks are included, this figure rises to 62%.

Of the $2.5 Trillion dollars expected to be spent in the United States on health care this year, what percentage is paid by taxpayers? The Kaiser Family Foundation calculates that 46% of health care spending was publicly financed in 2006, but this number seems to exclude health care for government employees. The Center for Medicare & Medicaid Services collects data on health care spending in its National Health Expenditure survey, which can be used to perform a direct calculation on the government share of health care financing. The following table summarizes the 2007 NHE data, the latest year for which a detailed breakdown is available:

Category Amount (2007 $ Billions)
Medicare [1] 418
Medicaid (Including State Funding) 340
Other Public Health Programs [2] 189
Federal, State, and Local Employee Health Care 134
NIH and FDA Budgets [3] 32
Total Public Spending 1113
All Private Health Spending 1018
2007 Total US Health Spending 2131

The 2007 data show that 52% of all health care in the United States is publicly financed. The NHE data also show that from 1987 to 2007, the government’s share of health care financing has risen by ten percentage points, or about half a percentage point per year. This means that in 2009, the public share of health care spending is likely at 53%, or perhaps higher as a result of rising unemployment due to the recession. If health care subsidies (primarily tax exemptions) are included as government financing of health care, they add another $200 Billion to the total, raising the government’s share of health care spending to 62%.

With the government already paying for the majority of US health care, one thing is clear about the current health care reform debate: The debate is not about whether the government will take control of the health care system, as that has quietly taken place over the last 40 years. The real debate is about how the government should distribute its health care spending, and on whether it will be able to rein in endless health care cost growth.

[1] The detailed NHE data split up by source of payment can be found here:

In calculating the numbers in the above table, I used Table 1 in the pdf. I allocated all costs associated with Medicare to the public sector, unlike the table in the pdf, which counts Medicare premiums and contributions as private sector payments. From a standpoint of determining government involvement in the health care system, it makes more sense to count all Medicare dollars as public financing, particularly since paying Medicare taxes is precisely how most of the Medicare system is funded!

[2] According to the NHE pdf, other federal, state, and local health programs “Includes maternal and child health, vocational rehabilitation, Substance Abuse and Mental Health Services Administration, Indian Health Service, Office of Economic Opportunity (1965-74), Federal workers’ compensation, and other miscellaneous general hospital and medical programs, public health activities, Department of Defense, Department of Veterans Affairs, and State Children’s Health Program (SCHIP)” and “Includes other public and general assistance, maternal and child health, vocational rehabilitation, public health activities, hospital subsidies, and state phase-down payments.”

[3] The NIH budget is $30 Billion, and can be classified entirely as health care spending, though it’s often left uncounted. But isn’t research to cure disease health care spending? If it’s not, then what exactly is it? I have also included two-thirds of the FDA budget, as that is the portion related to drug and medical device supervision.

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The Mystery of Health Care Pricing

Many economists, think tanks, and politicians have been agitating for more consumer-driven health care in the US. They argue that if consumers have to spend their own money for care, they will tend not to waste health care resources, and they will shop around for cost-effective care. The first part of this argument appears valid, as individuals will always spend their own money most carefully. Studies have validated this hypothesis, showing that individuals with high-deductible insurance and health savings accounts (HSAs) tend to spend less than those on traditional insurance.

But are individuals able to shop for health care in a competitive marketplace? Personal experience and numerous reports indicate otherwise. In the US, most health care providers can’t tell you the price of any particular health care service until after it’s been performed! I recently shopped around for a health care service, and called four doctors’ offices in total. One office told me that they “aren’t allowed to provide that sort of information.” Two more offices were flabbergasted, and attempted to ease their way out of the conversation. Only one office was able to answer with an actual price quote.

Why is this so difficult for medical providers? Virtually all chargeable medical services have associated CPT Codes, which are defined by the American Medical Association [1]. Hospitals, labs, and most medical practices have a chargemaster, which is essentially a price list. Even small practices without explicit chargemasters know the rate their doctor charges for his time. When insurers and medical providers negotiate payment structures, they negotiate using the chargemaster rates (and usually Medicare rates) as starting points for negotiation.

The currently proposed health care reform plans have missed this essential element: require all health care providers to publish standardized price lists, and market competition can begin [2]. For doctors, a simple hourly rate should be enough to satisfy this requirement. Hospitals and labs should be required to initially publish online price lists for their most common charges, with the list expanding over time. While this information is irrelevant to patients in emergency situations, the great majority of health care spending is pre-planned [3].

Put another way, why not include a mandate on medical price lists as part reform? The cost of the mandate to providers is extremely low, as the information is available, and publishing the information online eliminates distribution costs. While price transparency is making slow progress, Congress has an opportunity to make this happen, and should do so as part of the health care reform package.

[1] The AMA would likely be a primary opponent of free publishing of CPT code-based price lists, since it derives signicant ($70M per year) income from its copyright on CPT codes. If the government is to open up the pricing market, it may have to break this monopoly by buying the copyright at fair value and putting it in the public domain.

[2] Consider a scenario in which all doctors are required to provide price lists. Since most small practices would find this difficult, they might just quote a maximum hourly charge. One surgeon might quote $1000 per hour, and another $2000 per hour. And there you have it, competition on price can begin, just as it occurs for plastic surgery, Lasik, and other out-of-pocket services today!

[3] According to the Kaiser Family Foundation, roughly 70% of health care expenditures are non-hospital expenses. Since many hospital expenses are planned, it appears that significantly less than 30% of health care expenses are emergencies in which consumers have no choice of provider. According to ACEP, only 3% of health care costs are emergency-related.

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How Much Should the US Spend on Defense?

In this time of fiscal constraints and global insecurity, how much should the United States spend on national defense? US defense spending hit $710 Billion in 2008 when foreign wars are included [1], amounting to roughly half of all worldwide defense spending [2]. The table below compares US defense spending with US GDP, with our adversaries’ defense budgets, and with the rest of the world.

Category Amount (2008 USD) Comparison
US Defense Spending $710B 4.98% of 2008 US GDP [3]
World Defense Spending $1470B US share is 48.3% of world defense spending [2]
US Adversaries’ Defense Spending – China, Russia, Iran, Myanmar, Venezuela, Cuba, North Korea $217B US Defense spending is 3.3 times that of our adversaries [4]
World Minus NATO $442B US Spends 1.6 times the World minus NATO [5]
World Minus Major US Allies – UK, France, Japan, Germany, Italy, South Korea, Australia, Canada, Israel $473.3B US Spends 1.5 times the World minus major allies [6]

Defense hawks have advocated that the US spend at minimum 4% of GDP on defense annually. This would equate to a defense budget of roughly $570 Billion in 2010, roughly in line with President Obama’s FY10 budget. But aligning defense spending with GDP is somewhat arbitrary, as US defense spending as a percentage of GDP has varied significantly over time.

A more rigorous approach would involve comparing US defense spending to world defense spending, and to its adversaries’ defense spending. The US could match the defense spending of the entire non-NATO world for roughly $450 Billion. With NATO members as long standing allies, the US could match the defense spending of all its theoretical adversaries combined for 37% less than it spends today. The combined defense spending of credible adversaries (China, Russia, North Korea, Iran, and some Arab nations) would still amount to less than half of America’s defense budget!

As the US begins to contemplate fiscal discipline (as lenders slowly run out), cutting the military budget will be unavoidable. Gradually cutting $200B annually from the US defense budget would make a huge impact on the deficit. Thankfully, it appears that cuts of this size can be made without jeopardizing the defense of America itself.

[1] From the US DOD Green Book, FY2009 defense spending appropriations total $709.58 Billion – see pdf page 14 (page 6 as marked on the document) for the FY2009 constant dollars figure.

[2] There are a number of estimates of total worldwide military expenditure. The Center for Arms Control and Non-Proliferation and SIPRI both estimate that total worldwide defense spending equaled roughly $1.47 Trillion in 2008. US spending of $710B equals 48.3% of this total. The Center for Arms Control’s numbers match the US DOD numbers and NATO numbers, lending credibility to these estimates.

[3] The US BEA provides its estimate of 2008 US GDP on page 8 here – $14.264 Trillion.

[4] This estimate includes all potential US adversaries that spent more than $1B on defense in 2008, per the Center for Arms Control. The 2007 estimate for North Korea was used.

[5] NATO countries excluding the US spent $318 Billion on defense in 2007 (see page 4 of the pdf). This number was not inflation adjusted, making it a very conservative estimate for 2008.

[6] All US allies with defense budgets greater than $10B are included here, per the 2008 Center for Arms Control estimates. Saudi Arabia, Turkey, Brazil, and Spain are not counted as major allies here, making this a conservative list of major allies. All countries included on this list are secular democracies with almost no likelihood of engaging in future conflict with the US. Collectively, the UK, France, Japan, Germany, Italy, South Korea, Australia, Canada, and Israel spent $287 Billion on defense in 2008.

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List of Countries with Universal Healthcare

Update 1/21/2013: With the Supreme Court’s decision to uphold the ACA (aka Obamacare), and President Obama’s inauguration to a second term today, the US will have universal health care in 2014 using an insurance mandate system.

Thirty-two of the thirty-three developed nations have universal health care, with the United States being the lone exception [1]. The following list, compiled from WHO sources where possible, shows the start date and type of  system used to implement universal health care in each developed country [2]. Note that universal health care does not imply government-only health care, as many countries implementing a universal health care plan continue to have both public and private insurance and medical providers.

Country Start Date of Universal Health Care System Type
Click links for more source material on each country’s health care system.
Norway 1912 Single Payer
New Zealand 1938 Two Tier
Japan 1938 Single Payer
Germany 1941 Insurance Mandate
Belgium 1945 Insurance Mandate
United Kingdom 1948 Single Payer
Kuwait 1950 Single Payer
Sweden 1955 Single Payer
Bahrain 1957 Single Payer
Brunei 1958 Single Payer
Canada 1966 Single Payer
Netherlands 1966 Two-Tier
Austria 1967 Insurance Mandate
United Arab Emirates 1971 Single Payer
Finland 1972 Single Payer
Slovenia 1972 Single Payer
Denmark 1973 Two-Tier
Luxembourg 1973 Insurance Mandate
France 1974 Two-Tier
Australia 1975 Two Tier
Ireland 1977 Two-Tier
Italy 1978 Single Payer
Portugal 1979 Single Payer
Cyprus 1980 Single Payer
Greece 1983 Insurance Mandate
Spain 1986 Single Payer
South Korea 1988 Insurance Mandate
Iceland 1990 Single Payer
Hong Kong 1993 Two-Tier
Singapore 1993 Two-Tier
Switzerland 1994 Insurance Mandate
Israel 1995 Two-Tier
United States 2014? Insurance Mandate

Will the United States join this list in 2014?

[1] Roughly 15% of Americans lack health insurance coverage, so the US clearly has not yet achieved universal health care. There is no universal definition of developed or industrialized nations. For this list, those countries with UN Human Development Index scores above 0.9 on a 0 to 1 scale are considered developed.

[2] The dates given are estimates, since universal health care arrived gradually in many countries. In Germany for instance, government insurance programs began in 1883, but did not reach universality until 1941. Typically the date provided is the date of passage or enactment for a national health care Act mandating insurance or establishing universal health insurance.

System Types:

Single Payer: The government provides insurance for all residents (or citizens) and pays all health care expenses except for co-pays and coinsurance. Providers may be public, private, or a combination of both.

Two-Tier: The government provides or mandates catastrophic or minimum insurance coverage for all residents (or citizens), while allowing the purchase of additional voluntary insurance or fee-for service care when desired. In Singapore all residents receive a catastrophic policy from the government coupled with a health savings account that they use to pay for routine care. In other countries like Ireland and Israel, the government provides a core policy which the majority of the population supplement with private insurance.

Insurance Mandate: The government mandates that all citizens purchase insurance, whether from private, public, or non-profit insurers. In some cases the insurer list is quite restrictive, while in others a healthy private market for insurance is simply regulated and standardized by the government. In this kind of system insurers are barred from rejecting sick individuals, and individuals are required to purchase insurance, in order to prevent typical health care market failures from arising.

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Medicare Bankrupt in 6-8 Years Without Rationing

Think rationing is impossible in the US? Medicare will soon be bankrupt, and the government will have to spend its healthcare funds in a limited, rationed way.

Medicare’s annual spending exceeded revenue brought in from taxes in 2008, forcing Medicare to begin spending its reserve funds. According to the Medicare Trustees, Medicare’s reserve will be empty by 2017, and Medicare will have to cut benefits or payment rates by 19% to balance its budget [1]. Since the projected date of Medicare’s bankruptcy has been brought forward many times [2], it’s likely that the actual date of bankruptcy may be as early as 2015.

This should come as no surprise to observers of US healthcare policy, since Medicare has limited funds, but nearly unlimited liabilities. Medicare will pay for almost any treatment that a licensed doctor provides, without regard to the effectiveness of that treatment, or its own ability to pay for that treatment.

In the past, politicians have paid for Medicare’s growth through borrowing. That route will be unavailable this time, as US government debt will exceed GDP by next year, and could be over 120% of GDP by 2017. Raising taxes will be difficult as well, since tax revenues will have to be increased just to pay for the existing debt! If Congress and the President fail to curb Medicare cost growth as part of health care reform, the cuts in 2017 will look a lot like California’s budget, where the state was forced to cut $16.1 Billion (18%) from its  in state services across the board.

The current health care reform plans have introduced a variety of cuts in Medicare, which may reduce costs in the short term. But none of the plans under consideration address Medicare’s root problem: Medicare is not allowed to say NO. Rationing health care is not part of the current health care discussion, but it happens covertly today, and it will become the norm. If Medicare is to avoid insolvency, the government will have to decide when some procedures just aren’t worth doing. Seniors should be allowed to pay extra for those procedures, but Medicare will have to limit its responsibility. If you don’t believe me, look at California, where they finally learned that when the money’s gone, it’s gone.

[1] The Medicare Trustees’ Report Summary can be found at: http://www.ssa.gov/OACT/TRSUM/index.html

The fiscal situation referred to in this post refers specifically to the solvency of the Medicare Part A, the Hospital Insurance (HI) fund. Other parts of Medicare are in slightly better shape, but not by much. In 2017 the HI fund will have revenue for 81% of benefits, but in 2035 it will have revenue for only 50% of benefits.

[2] The Medicare Trustees note that the 2008 Report projected a Medicare HI Fund insolvency date of 2019 – it was brought forward 2 years this year. The solvency calculations also assume that Medicare will cut payments to medical providers based on a Deficit Reduction Act formula – but every year from 2003-2009, these cuts have been rolled back. The likely date of insolvency may move forward by a few more years as a result.

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US Doctors Are Overeducated

US medical students study for 8 years prior to residency, compared to 5-6 years of study in the rest of the world. This discrepancy increases health care costs by $25 Billion annually without contributing to quality.

In the UK, medical students study for five years after high school before beginning residency. They can expect to become practicing doctors by their late 20’s. This is true in Australia as well, where it’s possible to become a practicing doctor after less than 10 years of post-secondary education.

In much of Europe, medical students study for 4-6 years before beginning vocational training, and this process is slowly being standardized throughout the EU. Finally, in Japan, Brazil, China, India, and many other countries, medical education involves a 5-6 year degree followed by optional specialty training.

Since medical students in the US have a career path two years longer than in most other countries, their initial salary requirements must inevitably be higher to compensate for two years of extra tuition and lost salary. Using a career ROI calculation, it’s possible to estimate that US doctors must be paid an additional $30,000 per year as a result of this additional schooling [1]. With roughly 800,000 physicians in the US, that amounts to $25 Billion per year in additional compensation!

Why does the US stand almost alone in requiring aspiring doctors to study for eight years before training for another 3-8 years prior to practicing medicine? Is it possible that American doctors are better at their profession as a result? In fact, a small number of accelerated six-year medical programs exist in the US, and these programs have extremely competitive admissions. In a 6 year program, typical Bachelors-level general college education is curtailed while still accommodating a full four years of medical school. This model should become the norm rather than the exception, enabling medical students to enter careers more quickly and with less, thereby saving the entire health care system money!

[1] Using the spreadsheet used to perform Career ROI calculations, we can first adjust the medical student’s career path to shorten it by two years. This will raise the NPV and rate of return. We can then lower the expected salary to the point that the NPV is equivalent to the original NPV – the difference in salary is the salary amount made necessary by the extra schooling.

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The Hidden Trucking Industry Subsidy

Freight trucks cause 99% of wear-and-tear on US roads, but only pay for 35% of the maintenance. This $60B subsidy causes extra congestion and pollution, and taxpayers pay the bill.

It seems obvious that the heavier the vehicle, the more damage it does to roads over time. A 40,000 pound big rig probably does a bit more damage than your average 3500 pound consumer vehicle, right? It turns out that vehicle road damage doesn’t rise linearly with weight. Road damage rises with the fourth power of weight, and this means that a 40,000 pound truck does roughly 10,000 times more damage to roadways than the average car [1]!

In other words, one fully loaded 18-wheeler does the same damage to a road as 9600 cars. According to the American Trucking Associations (ATA), the trucking industry represents 11% of all vehicles on the road in the US, while paying 35% of all highway taxes. But if trucks represent 11% of vehicles, their heavy loads cause them to do 99% of all road damage! [2] The trucking industry paid $35 Billion in highway taxes in 2005, according to the ATA. Since most of the $100 Billion in highway taxes paid goes to maintenance (and US infrastructure maintenance is far behind), this implies that the trucking industry receives a $60 Billion annual subsidy from other drivers.

What are the negative effects of this subsidy? Since the trucking industry doesn’t pay the true cost of its road usage, it benefits relative to rail and other forms of transport. Freight rail lines are privately owned and maintained in the US, so they don’t receive a similar subsidy. As a result, more truck traffic ends up on highways than the market would dictate, leaving the taxpayers poorer, the air dirtier, and the roads more congested.

[1] Here’s some information on US pavement equations, including the statement of the fourth power law. Here’s another statement of the same, which also shows that on weaker surfaces, damage rises with the 6th power of the load.

[2] In order to calculate the damage done by trucks versus other vehicles, let’s assume that a fully loaded truck does the same damage to the roadway as 9600 cars, as mentioned above. In that case, then 11%, or 0.11 * 9600 = 1056. This is a measure of total damage done by truck traffic. Meanwhile, car traffic does 89% * 1 or 0.89 in damage. So the total damage is 1056 + 0.89 or 1056.89, of which 1056, or 99.9%, is done by trucks.

Perhaps half of all trucks are actually traveling empty. If an empty truck weighs 20,000 pounds, then it puts 4000 pounds onto each of its five axles, versus 2000 pounds on each axle for a car. The truck will do 2^4 more damage than the car, or 16 times more damage. So let’s add the totals back up: 5.5% * 9600 + 5.5% * 16 = 529. 529 / 529.89 = 99%. In fact, even if all big rigs in the US traveled empty, they would still do two-thirds of all damage to US roads!

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How Much Would Universal Healthcare Cost?

Universal health care would cost $70 Billion for 2009 if enacted using a market-based approach, but this cost will grow rapidly if overall health care inflation is not tamed.

How much would health coverage for all uninsured Americans really cost? Critics maintain that covering all Americans would break the US budget (which is already overstretched), while advocates maintain that covering all Americans can be done affordably. But how much would universal coverage really cost?

The Commonwealth Fund provides a great summary of the costs of proposals under consideration, including Medicare for all, a Building Blocks extension of the current system, and other proposals. Proponents of universal Medicare claim that it will save the US $58 Billion in 2010, since Medicare operates more efficiently than private insurers [1]. Providing universal coverage through incremental changes could cost anywhere between $48B and $120B, according to analyses by the Urban Institute and the Lewin Group, a private health care consultancy. And while Medicare for all would lower total health care spending, it would raise the Federal government’s share of spending by almost $200 Billion per year.

With numbers all over the map, is it possible to come up with a plausible estimate for comparison purposes? Sites like ehealthinsurance.com now make it much easier to get estimates for insurance coverage. Using this data, we can estimate how much basic health insurance coverage would cost for the 45 million uninsured Americans. The experience of Massachusetts, which has implemented universal health care, can also be used to project an estimate for the rest of the country. Since Massachusetts’ health care costs are above US average, this provides a high-side estimate.

Using market insurance quotes, the cost of providing a health insurance with a $1000 deductible and prescription coverage would amount to $2500 per person annually, or roughly $115B per year [2]. This calculation uses different insurance rates for different age groups among the uninsured, based on this demographic breakdown of the uninsured provided by the Kaiser Foundation. In Massachusetts’ experience, covering each uninsured individual costs roughly $3400 per year. Covering all 45 million uninsured Americans at this rate would cost $150 Billion per year.

The midpoint of these estimates is around $130 Billion per year. To get a final estimate, money currently spent on uncompensated care must be subtracted out, since there is no uncompensated care in a universal health care system. Approximately $58 Billion will be spent on uncompensated care in 2009 [3], and subtracting this figure out leaves roughly $70 Billion in annual expenditure required for universal health care.

While $70 Billion per year sounds like a lot of money, it’s actually less than many estimates. It looks increasingly likely that some kind of health care reform will be passed in 2009, and that money will be found to pay for it for the moment. The bigger question is, how will it be paid for tomorrow? Unless health care cost growth is pulled into line with inflation, no one has that answer.

[1] Medicare doesn’t have to perform medical underwriting, and it doesn’t have to spend money on advertising, sales, or shareholder dividends, so its overhead should be lower than private competitors, if it can maintain efficiency. Critics counter that Medicare suffers from high fraud rates precisely because it is a government bureaucracy without competition to force it to raise efficiency and tighten controls.

[2] Here is the rough cost estimate for each demographic group, taken from quotes on ehealthinsurance.com:

0-19: $100/month  (20% of all uninsured)

20-29: $150/month (29% of all uninsured)

30-44: $200/month (27% of all uninsured)

45-64: $400/month (24% of all uninsured)

Using these numbers, we calculate a weighted average cost per person of $213 per month, or $2556 per year. That’s $115 Billion for 45 million people.

[3] In 2004, uncompensated care expense was estimated at $40.7 Billion. Since health care spending (in nominal dollars) has grown at 7.5% per year during this decade, the adjusted number for 2009 is approximately $58 Billion. This assumes that uncompensated care is growing in line with health care costs as a whole.

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The True Cost of Gun Ownership

The gun industry generates a total economic loss of $15B per year in the United States.

Guns are a part of American culture, and guns are also a part of the economy in the US. While not a large industry, the small arms and hunting industries contribute roughly $29B annually to the US economy [1]. While many industries have externalities (think pollution), the gun industry’s externalities are particularly damaging: 31,000 deaths and 70,000 injuries per year [2].  From an economic standpoint, the cost-benefit of US gun ownership and the gun industry can be measured by weighing the economic benefit of the gun industry against the economic loss caused by premature deaths and injuries.

What is the annual economic loss associated with 31,000 deaths and 70,000 injuries? By looking at loss of income alone, each gun death can be valued at roughly $1.4M, or $43 Billion in total lost income [3]. A 1994 study published in JAMA concluded that medical costs from gun injuries cost another $2.3B, or $4B today including inflation [4]. The total economic costs of $47 Billion per year from gun industry externalities thus greatly exceed the economic benefit of the industry!

Perhaps this is not surprising. Guns were invented as military weapons, and while hunting and recreation are part of today’s industry, guns’ primary use remains human combat. In the 20th century, the arms industry split into two industries: a hugely profitable defense industry which sells only to the government, and a tiny small arms industry accessible to ordinary American citizens. Despite causing a $15B loss every year to the American economy, the American small arms industry exists because it is protected from its liabilities by the Second Amendment and its political allies.

Can this situation can be improved? The gun industry has thus far successfully resisted efforts at further regulation, and the NRA and other organizations have created a potent political alliance to prevent a change in the status quo. Eventually, an industry with huge negative externalities has to improve its behavior as attitudes shift, or public sentiment and politicians will force the issue (the oil and tobacco industries come to mind). The gun industry would do well to cooperate with reasonable regulations that decrease its negative side effects, or it risks harsher regulations down the road.

[1] The gun industry’s estimated total value in 1999 was $24B, or $29B today when adjusted for inflation.

[2] According to the CDC, there were roughly 31,000 deaths involving firearms (including homicides, suicides, and accidents), and  70,000 non-fatal injuries related to guns annually.

[3] Gun death rates peek in the 18-24 age range, and fall sharply after 30, according to the CDC (select Age under Output Group). Assume that the average person killed by a gun loses 35 years of productive life (from 35-70) . 35 years * US per capita income of roughly $40,000 equals $1.4 Million per person. No NPV adjustment is needed, because gun deaths are cumulative over time – last year’s gun deaths contribute to this year’s losses as well.

[4] This study concludes that the medical costs associated with firearms injuries were roughly $2.3B per year in 1994. Assuming a health care rate of inflation of 4% over the last 15 years (lower than the real rate!), this $2.3B equals $4B in 2009 dollars.

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US debt to exceed GDP by 2010!

In Febuary, I predicted that US federal debt would exceed US GDP by 2015. It appears that I was too optimistic at that time.

The Obama Administration’s latest budget projections now show that the debt may exceed GDP as soon as 2010! This year’s deficit is expected to rise to $1.75 Trillion, raising the total debt from the current 11.2 trillion (4/9/09) to almost 13 trillion by year end. Next year’s deficit is projected to be in the trillion dollar range, driving the debt up to 14 trillion [1], which is roughly equivalent to 2008 GDP. Since GDP growth will be negative in 2009 and modest in 2010, it’s not unlikely that GDP and gross federal debt will be equal at the end of 2010 [2].

It looks like the budget situation may force decisions on big government programs like Medicare, Social Security, and Defense sooner than most expected – and likely sooner than the Administration would prefer. Here’s to the return (or beginning?)  of fiscal discipline!

[1] See Table S-9 in the White House Budget for FY 2010, showing gross debt of 14.078 Trillion for 2010.

[2] Table S-8 shows the White House’s economic growth assumptions, which are more optimistic than many mainstream economists’ assumptions. In fact, the table itself shows that both the CBO and private economists have lower growth projections than the White House (kudos for the honesty). The CBO estimates GDP at 14.6 Trillion for 2010, meaning that any further slippage in the budget cause the debt to surpass GDP.

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