This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Salmon: Why Fiscal Problems Don't Have Fiscal Solutions

NEW YORK ( Reuters Blogs) -- The main lesson I've learned from the sequester fustercluck, and from the failure of austerity programs in Europe, is that you can steer yourself very, very wrong indeed if you try to find fiscal solutions to fiscal problems.

The two phenomena are different: the stated aim of the sequester was to focus attention on long-term fiscal problems, while European austerity is generally targeted much more at the short term. But both resulted in the same thing: governments cutting their spending and hurting growth, when growth is the only real solution to the problem at hand.

In Europe, the key short-term problem is unemployment; in the U.S., the long-term problem is America's ability to pay its scarily-rising healthcare costs. In neither case do government budget cuts do anything whatsoever to address the problem; instead, they exacerbate it.

Unemployment is the more obvious case: if the government lays off thousands of workers, and stops injecting money into the economy through other channels, that's never going to help people find work in the short term. But the case against a fiscal solution to the healthcare-cost problem is also a pretty simple one. Here's John Carney :

The main challenge we face on entitlements is not financial -- it's demographic. It's not really even a question of "entitlements" at all. The challenge is just whether the economy in the future will be productive enough to produce all the medical care, food, and shelter required by the elderly when there are fewer people actually working. How we pay for this is secondary matter.

To put it differently, no matter what budget reforms we enact, we have a long-term care problem -- not a long-term deficit problem. Even if we dramatically cut down on the long-term deficit by slashing entitlement spending, so that any care in excess of that has to be funded privately, we'll still face the same challenge.

That challenge cannot really be solved through budgets. No matter how much we tax now, no matter how much we save now, in the future the economy will be limited to what it is able to produce. The challenge is to set that limit as high as possible, so there is as much as possible for the young and the old to divide it among themselves.

Put aside, for one minute, the question of whether marginal discretionary government spending is good or bad for economic growth; the point here is that the problem of healthcare costs isn't fiscal. Indeed, it's easy to go even further than that, and to say that the more money the government spends on healthcare, the smaller that the problem of healthcare costs becomes. After all, everywhere in the world, including in the US, the government gets by far the best price in the market when it spends money on healthcare. If you switch healthcare expenditures from the public sector to the private sector, all you do is make them more expensive.

And as Joe Weisenthal points out, quoting Richard Koo, the more that a government worries about long-term fiscal balance, the less effective it becomes in attempting to stimulate the economy to provide the kind of growth that everybody wants to maximize. Just look across the Pacific, says Koo: Japan has never once met its fiscal targets in the past 20 years, precisely because it has been consistently far too worried about meeting its medium-term fiscal targets.

The solution to all these problems has to be to maximize the number of people with jobs; to maximize the amount of money those jobs pay; and to maximize the number of years that people are earning money in those jobs. Eduardo Porter makes the case for raising the retirement age, which of course would reduce the increase in Social Security costs. But he also makes the point that if people stay in well-paying jobs for longer, that benefits the entire economy -- which in turn will improve our ability to provide America's seniors with the healthcare they deserve.

Meanwhile, the rhetoric of the sequester is making everybody look in exactly the wrong place for solutions to America's long-term fiscal problems. The amount that the government spends on national parks, or on FBI salaries, or even on mine-resistant, ambush-protected Army vehicles, is of course irrelevant to the question of how to create an economy which can afford medical care for all over the long term. But it also creates a framing problem -- making it seem as though government expenditures are the nail, and that therefore budget cuts are the necessary hammer. Even as, all the while, the deep and real problems become that much more structural, embedded, and intractable.

-- Written by Felix Salmon.

Read more of Felix's blogs at Reuters.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
AAPL $126.60 0.15%
FB $80.00 -1.48%
GOOG $567.68 -1.33%
TSLA $193.88 -3.36%
YHOO $43.44 -1.63%

Markets

DOW 17,856.78 -278.94 -1.54%
S&P 500 2,071.26 -29.78 -1.42%
NASDAQ 4,927.37 -55.4390 -1.11%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs