The New Republic (hat tip: Alex Etra) has an excellent article by Noam Schieber examining Sino-American relations in light of the economic crisis and growing U.S. debt. The story begins with a great anecdote from the annual U.S.-China Strategic and Economic Dialogue July, at which Office of Management and Budget director Peter Orszag briefed visiting Chinese diplomats on the state of American economy:
To his surprise, when Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn't dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. "They were intrigued by the most recent legislative developments," Orszag says. "It was like, 'You're fresh from the field, what can you tell us?' "
As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world's largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care. "At some point, if you refuse to contain health care costs, you'll go bankrupt," says Andy Xie, a prominent Shanghai-based economist, formerly of Morgan Stanley. "It's widely known among [Chinese] policymakers." [...]
Indeed, the joint announcement that capped two days of talks in Washington actually included a U.S. commitment to "reform its health care system with the aim of controlling rising health care costs for businesses and government . . . [and] reducing the federal budget deficit relative to GDP to a sustainable level by 2013."
The article touches on many of the issues brought up at yesterday's Bernard L. Schwartz Economic Symposium on "Dealing with America's Debt Overhang: Growth or Austerity, and Other Policy Choices." We live-tweeted the event, which was put on by New America's Economic Growth program.
In true New America style, the event was provocative and insightful. The diverse collection of speakers touched on a variety of topics such as: the nature and timing of our economic recovery; the role of public versus private debt in driving that recovery; as well as the future of the dollar and its reserve currency status in the global financial system (if there is a system...)
We'll leave the heady, big picture macro-economic analysis to our colleagues at the New American Contract. But Thomas Palley, a Fellow at New America and a former chief economist, China Economic and Security Review Commission, touched on a topic near and dear to our hearts- - health care.
Palley's talk outlined the dangers of what he called the "fiscal austerity trap." It's a nuanced argument, and we'd recommend watching the video from the event as well as checking out Palley's slides. We'll try to boil it down to a few points:
- The stimulus and deficits were necessary to prevent the next great depression. They helped the private sector deleverage, while promoting economic growth.
- Concerns about the deficits created from such spending are overblown and the "fiscal austerity" policies promoted by some to address current budget shortfalls will actually make things worse by retarding growth.
- We should be concerned about sustainable budget deficits -- one that holds debt constant as a percent of GDP.
- One of the best ways make our long term budget sustainable is to reform health care. In fact if we let the Bush tax cuts expire and got health care costs to grow at the rate of per-capita GDP (an admittedly tall task) long term budgets would be in surplus and debt as share of GDP would be far lower.
There no free lunches with deficits, Palley acknowledges, but "more fundamentally, we have a health care cost problem," that is threatening our fiscal future. Furthermore:
The problem with our health care costs is not fixed by fiscal austerity. Fiscal austerity is not the instrument that tackles the health care costs. That problem still remains on the books. That means fiscal austerity could actually worsen the budget outlook and in my book that means fiscal austerity is in fact a form of economic malpractice.
None of this is to suggest that deficits don't matter. Indeed, both the president and members of Congress have repeatedly pledged that health reform will be budget neutral. Yet, critics who say we can't afford health reform need to realize there's more to fiscal responsibility than baselines and budget windows. As any Chinese diplomat will tell you, the U.S. can't afford not to reform its health care system.