President Obama addressed a joint session of Congress last night about the State of the Union. For those who ever wondered what this means in common terms, the President provides the country an annual update of the United States federal government. Despite numerous references to his Republican friends, he failed to address the true elephant in the room – the fact that health care costs are escalating at unsustainable rates, and this will bankrupt this country within this writer’s lifetime should nothing be done. This is due to costs growing at rates faster than the United States economy.
We know health care costs are also threatening businesses in the short term. This is illustrated by the fact health care costs are dramatically squeezing the bottom lines of businesses large and small. Workers are being asked to pay a larger percentage of their health care, and rising insurance premiums translates to less take-home pay. Meanwhile, uncertainty from government regulations makes it difficult for businesses to expand, and many are unprepared for upcoming compliance requirements from the ACA. Other regulations have huge unintended consequences, particularly in added costs for reporting requirements for physicians and hospitals.
From a Macroeconomic perspective, there are also serious funding concerns for the United States Federal government long-term. This is because of rising health care costs as Medicare and Medicaid spending will be exacerbated under the Affordable Care Act. Medicaid will be expanded and will be costly. An article written last year which truly illustrates the problem can be found by clicking here.
Last week marked 1,000 days since the United States Senate passed a budget. While the budgetary process is mostly a political exercise, it serves a purpose by laying a framework for the appropriations process, which is where how money is distributed by Congress. When the budgetary process is not followed like it should be, it creates uncertainty because temporary “fixes” often have to be passed in order to continue funding government programs. These fixes are often referred to as Continuing Resolutions or CR. This basically means that the government will continue funding things at current levels for six months at a time here, three months, here and so forth.
So in short, the United States Government is like most Americans right now, surviving on a month to month basis, and the toxic political environment does not appear to be changing anytime soon. To put our fiscal situation in order, one must understand the context, and one way to do that is to look at the federal government as if it were an individual. Let’s call this person, Joe Six-Pack. Joe Six Pack makes roughly $40,000 per year, he has a steady job, but he has a spending problem. For the past decade or so, he has been spending more than he takes in. Last year, he spent $55,000 and is projected to spend around $52,000 for next year.
Meanwhile, he is four years of salary in debt or $160,000, and if he does not get things in order, he will be $280,000 in debt ten years from now. His credit cards are maxed out, and he is faced with a decision about how he should precede both in the short and long term. He needs to cut his expenses, and find a way to make money to pay this debt down over time, but he is afraid to make the tough decisions, and he keeps borrowing money but deep down knows he needs to stop.
The United States fiscal situation is no different than our friend Joe, it just has a lot more “zeros.” As you can see, if we cannot get things in order, future generations will be forced to pick up the bill. Even more frightening is the fact that eventually we may pass a point of no return as far as debt compared to our GDP. Unfortunately, this date is a lot closer than our leaders are willing to admit.