By far the biggest problem our country faces is long term debt. The public debt (on which we pay interest) is now 77% of GDP, the highest since the end of WWII, and steadily growing worse.  The fundamental driver of our debt problem is the cost of healthcare, public and private.
My last post describes two major reforms which are needed to get the cost of healthcare under control. The first, and most important, is to replace the tax exemption for employer provided care by a universal tax credit limited to the cost of catastrophic health insurance (with a high deductible).  This fundamental change would be accompanied by allowing tax preferred Health Savings Accounts for use in paying routine medical expenses.  The purpose here is to make all of us more responsible for the cost of our own healthcare.

The second big change which is needed is a

• Redesign of Medicare. Medicare is currently being subsidized by the federal government at a net cost (after FICA taxes and premiums paid) of over $400 billion per year, and this cost will continue to increase rapidly without a change in policy.

The best way to reform Medicare is to first modify the tax exemption for employer provided care, as mentioned above, and then gradually migrate Medicare onto this new system.  However, in the meantime there are more direct ways to make Medicare less expensive:

• Community-rated premiums. Medicare premiums should not vary based on age or health status but they should vary based on an enrollee’s income.
• Defined contributions and beneficiary choice. Enrollees would apply the government contribution to their choice among competing options for Medicare coverage.
• Facilitating healthcare savings. Tax-preferred Health Savings Accounts would be made available to Medicare enrollees to pay for routine medical expenses up to a deductible amount.

Conclusion. The current Medicare program is rapidly becoming too expensive for the federal government to fund with general tax revenues. A few simple and sensible changes will put Medicare on a sustainable course.

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My blog, It Does Not Add Up, addresses fiscal and economic issues facing the United States at the present time.  I am concerned about our slow economic growth which deprives many middle- and lower-income workers of their proper share of our nation’s increasing prosperity.  I am also concerned about our large and rapidly increasing national debt which will create a huge cost burden on society when interest rates resume their normal historical levels.
Another critical problem, left over from the Great Recession of 2008 – 2009, is how to properly reform our financial system to avoid another meltdown as occurred in 2007 – 2008.  To me this is a more complex issue than slow growth and huge debt and therefore harder to figure out what to do about it.  I am always looking for new sources of information on this topic and feel that I have just discovered a good one.  It is a new book, “Five Easy Theses”, by James Stone, the founder and CEO of the Plymouth Rock Insurance Group and former chairman of the U.S. Commodity Futures Trading Commission (1979 – 1983).
According to Mr. Stone the Dodd-Frank Act of 2010 is too weak in certain respects and three additional reforms are badly needed to avoid a new crisis:

• The scale and risk profile of large banks should be reduced by having the Federal Reserve impose progressively steeper capital requirements as they grow larger.
• Hedge funds should be regulated like mutual funds under the Investment Company Act of 1940.
• The leverage of derivative markets should be reduced decisively with meaningful reserve requirements (which do not net opposite positions to zero).

Mr. Stone emphasizes that he is offering “best” solutions, not constrained by political reality. The financial sector’s share of GDP is now at an all-time high of about 8%.  The enormous wealth enjoyed by those at the pinnacle of finance will make them powerful opponents of meaningful reform.
But it always helps to know in what direction we need to go.

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In the great debate over slow economic growth and falling incomes of the middle class, the usual culprits are globalization, growth of technology and income inequality.

Just published in the latest issue of the Harvard Business Review, “The Great Decoupling: an interview with Erik Brynjolfsson and Andrew McAfee” is a more focused analysis of what is happening. These two technology experts note that both labor productivity and GDP are growing much faster than the growth in the number of jobs as well as median family income.  This is what they refer to as the great decoupling.  They are careful to point out that the same trends are happening in other developed countries such as Finland, Germany and Sweden.
They emphasize that the best response to this decoupling is to create an economic environment that’s conducive to innovation, new business formation, and economic growth.  In their opinion this means to focus on five things:

• Education. Primary and secondary education systems should spend more time on things that computers are not good at such as creativity, interpersonal skills and problem solving.
• Infrastructure. World-class roads, airports and networks are the foundations of growth.
• More entrepreneurship. Most industries and regions are seeing fewer new companies than in recent decades.
• Immigration reform. The U.S. needs to attract more of the world’s most talented people. Immigrant-founded companies have been great job-creation engines.
• Basic Research. Since companies concentrate on applied research, the government needs to step up support for basic research. Both total and nondefense federal R&D spending, as percentages of GDP, have declined by more than a third since 1980.

The recommendations of Messrs. Brynjolfsson and McAfee are quite sensible.  But they will be hard to implement overall.  More federal funding for both infrastructure and basic research will be very difficult in an era of tight budgets.
This is the challenge of our time.  We must become better prepared to prosper in an era of increasing global competition and rapidly expanding technology.  And do this in a tight fiscal environment.
A very big challenge indeed!