A new paper by Daniel Thornton, an economist at the Federal Reserve Bank of St. Louis, contains some useful graphs on the causes of our debt crisis. The first graph below illustrates the rise of spending relative to government revenue; the second shows that the lion’s share of increased spending has been on social services, Medicare and Medicaid in particular:
Source: Thornton (2012)
Source: Thornton (2012)The graphs demonstrate, in the words of James Hamilton, that “Americans want an increasing government contribution to health care, but don’t want to pay for it.” It might be tempting to conclude from this that we either need to raise taxes to a level that corresponds to the government contribution we want, or we need to cut government spending, or both.But that’s not the whole answer. Raising taxes might make citizens more sensitive to the real cost of healthcare, but it would kill small businesses already struggling under tax burdens, particularly as they take on the costs imposed by Obamacare. Reducing government spending might close the budget gap this year, but it would still leave our healthcare system struggling with inefficiencies and ever rising costs.America needs to find ways of transforming the healthcare industry, not just ways to temporarily narrow the budget gap. We don’t have a deficit problem; we have a healthcare policy problem.