The CBO's Analysis of Obama's Budget

The CBO has released its analysis of Obama's 2011 budget. The CBO estimates Obama's budget will significantly raise fiscal deficits over the next 10 years. In 2011, Obama's deficit is only $140B greater than the CBO status-quo. Over the next decade, however, the difference between Obama's budget and the CBO baseline scenario is expected to reach up to $500B.

The stark difference between Obama's budget and the CBO baseline gives fodder to Obama's critics, particularly the tea-party movement. But a closer look reveals that the source of the disparities between the status-quo and Obama's budget is not what one would expect and has little to do with Healthcare reform or increased government spending.

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Average US Deficit Over Last 25 Years Was 10%

Rob Arnott from Research Affiliates wrote recently that one of the greatest problems with the US debt statistics is government accounting. In his words, "off-balance sheet spending is what got Enron executives thrown in jail, but I suppose if you write the laws while you're doing the off-balance sheet spending you can make it legal. That takes the average deficit to 4.5% of GDP over the last quarter century. 2% deficit is not a problem because GDP grows at 2% a year. 4.5% can grow out of sight...If you add-in the GSEs, the average deficit is 8% of GDP over the last quarter century. If you include unfunded entitlements, social security and medicare, you're up to a 10% average over the last quarter century."

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Japan's Debt Trap

It's hard to see how Japan's fiscal situation is anything but a crisis. Its national debt is fast approaching 200% of GDP. Its population is shrinking, meaning transfer payments rise as tax revenues fall. Additionally, Japan's life expectancy is one of the highest in the world. Japan is in a debt trap, where interest expense increases faster than its ability to pay it off.

Though Japan's debt has ballooned, yields have actually decreased. The reason for these low yields is the commitment of Japanese firms and households to Japanese bonds. Japanese debt is very unattractive to an investor, yielding only 1.4% for 10 years. Unsurprisingly, foreign ownership of Japanese bonds is only 6.4% as of last March, down from 7.9% a year ago.

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Obesity Panels Instead of Death Panels

The US healthcare debate can best be characterized as confusing and misguided. The opposition is obnoxious and incoherent and the Obama administration fails to stay on message. Most importantly, healthcare reform advocates have not successfully addressed the glaring misconceptions of many outraged Americans. One prominent example is the question of "death panels." This term comes from Sarah Palin, who used it to refer to the rationing of healthcare. Many believe the state would be able to "pull the plug on Grandma."

Putting it in this perspective isn't quite correct, but there is a modicum of truth to it. Under a government healthcare plan, there would be some rationing, but only of truly expensive and invasive procedures. It is ridiculous to think this would lead to an Orwellian system. Rationing is economically necessary. The US does not have the best healthcare system in the world (ranked #37 by the World Health Organization) yet it pays 50% more per capita. A third of healthcare costs are incurred in the last few days. As long as there are government insurance programs like medicare, rationing to a certain degree is a must. Everyone must come off dialysis eventually.

In my opinion, the healthcare debate is painful to watch from all sides. The Obama Administration has a powerful argument that hasn't gained much traction with the public, which has focused on emotional issues. The best case for healthcare reform is that the cost curve is too steep because of demographic trends (agining baby boomers). Without healthcare reform, we will have out of control budget deficits. I mentioned in a previous post Morgan Stanley's chief economist Richard Berner's prediction that a huge deficit would "lower our standard of living" and "imperil economic and financial stability."

While Obama's logic on healthcare is sound, his approach is misguided. Obama seems to repeatedly pick the wrong battles. Not only has he upped the ante in Afghanistan, where much larger Soviet and British forces failed miserably, now he is bogged down in a healthcare quagmire, where every president since Truman has failed. A better approach would be to vigorously attack another factor of spiraling healthcare costs: obesity.

It is no secret US obesity rates are ridiculously high. 41% of American women are obese. Men are not far behind. The Obama Administration may be right when it says the current healthcare system is inefficient, but 70% of healthcare costs are related to lifestyle diseases. Even making a small dent in these statistics--such as moving obesity rates to 30%--would have a significant effect of lowering the cost curve. The Milken Institute estimates America's obesity problem costs $1 trillion a year.

There have been no substantial government programs addressing this issue. Japan, a country not known for its overweight population, has done much more. In 2008, Japan enacted a law that forced everyone from age 40 to 70 to be measured at the waist as part of their annual checkups. If ones waist was bigger than the allowed amount, one would have to enroll in a nutrition program or face financial penalties (Check out NYTimes article here). Though politically unfeasible with an obese population of 40%, such a program would be a step in the right direction.