There might be 2 ways to look at the fiscal cliff.
Specifically, we can focus on tax increases and spending cuts:
Bush era tax cuts: expire
2010-2011 2% payroll tax cut: expire
Affordable Care Act taxes: kick in
Emergency unemployment benefits: expire
Budget sequester (cuts) from Super Committee failure: kick in
Previously legislated budget cuts: kick in
Defense cuts from Iran/Afghanistan reductions: kick in
Medicare payment rates for physicians: reduced
More broadly, we can take a step backward and look at the bigger problems that really have to be solved:
63% of the 2011 federal budget was on “autopilot.” Debating cuts, the Congress only looked at 37% of spending.
1 of 4 budget dollars is spent on healthcare. Looking back 50 years ago, less than 10% of all spending was healthcare, and looking forward, we are heading toward 33%.
Slicing federal employees and agencies would save money but not nearly enough. Even if we fired the entire federal payroll, the deficit would dip by less than one third.
Defense spending is massive. We spent 1 out of every 5 dollars on defense in 2011.
We now borrow close to 36 cents for every dollar we spend. And yet still, the more affluent are paying a larger proportion in taxes and the middle of the middle class (as expressed in the video) is paying a lower proportion.
Where does this leave us? Defined as taxing, spending and borrowing, US fiscal policy is the real fiscal cliff.
Sources and Resources: The specifics of the fiscal cliff are from a past econlife post while the summary of the big issues is from the David Wessel/WSJ video that follows. For even more detail, this Tax Foundation description of the fiscal cliff is good.
The beginning of life and the end of life are becoming more expensive.
The number of premature babies in the U.S. has soared by 36% during the past 25 years. Caused partially by twins, triplets, (and more) from older mothers and by advances in “assisted reproduction,” extremely premature babies born at 28 weeks and sooner need months and sometimes a lifetime of sophisticated medical technology. However, effective neonatal care can also prevent a lifetime of illness. (Here is an excellent New Yorker Magazine article about neonatal science.)
By 2050, close to 27% of the U.S. population will probably be older than 65 and the median age will be 41. Older than we are, Europe and Japan will have a median age that is close to 50 in 2050. Looking at diminished productivity and escalating health care, end of life cost can be high.
The Economic Lesson
Remembering that scarce resources require tradeoffs, how should we cope with the beginning and the end of life becoming more costly?
The health care expense of pre-term babies, at $18 billion, is estimated to be half the total spent on newborn care. Here, a Peterson Institute report cites health care for aging populations as a major source of governments’ budget pressures.
With economic cost defined as sacrifice, beyond finance, the cost of preserving life for the very young and the very old becomes even more expensive.
An Economic Question: Knowing that all societies can allocate a limited supply of land, labor, and capital to health care, what tradeoffs would you support?
The health care industry has added 300,000 jobs to the U.S. economy during the past 12 months. New jobs, new construction, new technology, more care. Should we be pleased?
This Dr. Seuss-like animated short from marketplace.org presents the downside of health care job growth. Discussing the issue further in a report on suburban Detroit, they explain that a new medical center can indeed help one community. However, a proliferation of medical facilities means higher health insurance premiums and soaring Medicare and Medicaid expenses. Consequently, although one community might benefit, overexpansion means the entire nation will suffer.
Here are additional statistics on the health care jobs boom. And here is another perspective in a previous econlife post.
The Economic Lesson
Sometimes what is good for one person becomes bad when everyone does it. If there is a fire at a public event, one person can rush to the exit but everyone simultaneously cannot. Enjoying higher prices, one farmer can decide to plant more and earn more. However, when all farmers together produce a bumper crop, price dips. Called the fallacy of composition, sometimes what is good for the individual is bad when everyone does the same thing.
An Economic Question: How does building too many medical centers result in the fallacy of composition?
Most of the corn flakes that we eat in the U.S. are illegal in Denmark because they have vitamin supplements. Consequently, the NY Timestells us that large food companies like Kellogg’s and small stores stocking Marmite, have to undergo an expensive and time consuming approval process if they want to sell a food with added vitamins and minerals.
Why do the Danes disapprove of supplements? Because they believe their diets are sufficiently healthy.
As economists, Danish vitamin regulation takes us to the role of government. Should government be able to tell Kellogg’s that they cannot sell corn flakes with Vitamin D?
Concerned that government could not possibly know what is best for each of us, economic philosopher Adam Smith (1723-1790) suggested that a “just” society required less government involvement. By contrast, contemporary Nobel laureate Paul Krugman believes that more government leads to a better world.
An Economic Question: Citing cost and benefit, explain why you approve or disapprove of Denmark’s ban on vitamin supplements.
Maine is an old state. At 42.7, the median age of Maine’s population is the highest in the U.S. The youngest state is Utah (large families and many children), with a median age of 29.2. Other “young states” include Texas and Alaska. And, while Florida does not have the highest median age, it does have the highest percent of people above 65. In the entire U.S., at 37.2 years, the median age is 5 years higher than it was in 1990.
This map of the U.S. shows which states are older and which have a younger population.
The Economic Lesson
A new Peterson Institute report cites health care for aging populations as a major source of governments’ budget pressures. Financial journalist Gretchen Morgenson discusses the report in Sunday’s NY Times. Also, research indicates that productivity and innovation diminish with age.
An Economic Question: How might an aging population affect each component of fiscal policy: spending, taxing, and borrowing?