ObamaCare Will Result in Lower Future Living Standards

Harvard economist Martin Feldstein penned a sobering article on the perils of ObamaCare and its resulting increase in the national debt, already at dizzying levels. His article, "ObamaCare's Crippling Deficits", which appeared in yesterday's Wall Street Journal, discussed the fact that Obama's massive budget deficits will result in lower future living standards:

The deficits projected for the next decade and beyond are unprecedented. According to an assessment released in March by the Congressional Budget Office (CBO), the president's budget implies that deficits will average 5.2% of GDP over the next decade and will be 5.5% of GDP in 2019. Without the president's proposals, the budget office forecasts a 2019 deficit of only 2% of GDP.

The CBO's deficit projections are based on the optimistic assumptions that the economy will grow at a healthy 3% pace with no recessions during the next decade; that there will be no new spending programs after this year's budget; and that the rising national debt will increase the rate of interest on government bonds by less than 1%. More realistic assumptions would imply a 2019 deficit of more than 8% of GDP and a government debt of more than 100% of GDP.

Such enormous deficits would crowd out productivity-enhancing investments in new equipment and software as the government borrows funds otherwise available to private investors. The result would be slower economic growth and a lower standard of living.

When Dr. Feldstein talks writes about Obama’s unprecedented budget deficits "crowding out" productivity-improving investments, he's referring to what economists call the crowding out effect. The crowding out effect is the most damaging macroeconomic effect of government spending financed by borrowing. When the government borrows money, they do so in the money market. The amount of capital available to borrow is not unlimited. Any money the government borrows means there is less money available in the financial markets for the private sector to borrow.

While there is no law that says the government gets first dibs on available capital, effectively they do. The government’s decision to borrow money is not dependent on the cost of borrowing (i.e. the interest rate). Government will take whatever they need, regardless of the cost. But, when they borrow money, the laws of supply and demand kick in. The increased demand for money by the government increases the interest rate or cost of that money to everybody.

Again, government doesn’t care about that increased cost but the private sector does. There is no reason for businesses to borrow other than to engage in profitable business activities. Assume we have a business which is considering whether or not to expand. They want to expand operations by building a new plant, for example. They look at the projected cost of the plant and the stream of projected revenues that plant will eventually generate. This analysis must show that the projected revenues will exceed the projected costs, discounted to the present, or the investment won’t take place. Anything that increases the cost of the investment decreases the probability that the investment will be profitable and, therefore, that it will take place at all. Businesses which invest for any other reason than to make a profit won’t remain in business.

Interest rates are an important cost associated with business investment. Higher government debt results in higher interest rates which results in less private sector investment taking place. Private sector investment leads to higher productivity, and higher productivity is the only way for future living standards to rise. Therefore, increased government debt leads to lower future living standards, period. In other words, government borrowing “crowds out” private sector borrowing, ultimately resulting in lower future living standards than would otherwise occur absent government borrowing.

What should Mr. Obama do first to ameliorate this increasingly bleak future? Dr. Feldstein's policy prescription is quite simple…and obvious:

The starting point for controlling those future deficits is for Congress to abandon the administration's health-care plan—a plan that will cost more than $1 trillion.

[...]

Dropping the Obama health plan would significantly reduce fiscal deficits over the next decade and help restore public confidence in the ability of Congress to control spending. The CBO estimates that the House committee versions of the Obama health plan would add more than $1 trillion to federal deficits over the next decade. But the actual costs would be much higher.

[...]

The total cost of ObamaCare over the next decade likely would be closer to $2 trillion than to $1 trillion.

Mr. Obama still maintains that ObamaCare can cover over 40 million uninsured and it will be self financing or, in the parlance of Washington, "deficit neutral". This is ludicrous. Dr. Feldstein explains why:

The administration's claim that the health-care plan would be "self-financing" is both false and irrelevant. It is false because it would only be self-financing if one counts a variety of President Obama's proposed tax increases—and even those would produce much less revenue than is assumed in the budget calculations. The claim is irrelevant because those tax increases have nothing to do with health care and could be used instead to reduce other projected deficits.

Read the rest of Dr. Feldstein's article here.

Tonight, Mr. Obama will use his teleprompter to once again try to fool an unwilling public into accepting a trillion dollar plus boondoggle that has no chance of working. It is nothing short of a massive power grab by the federal government that most Americans neither need nor want. Many articles have been written here over the past few months outlining the myriad dangers ObamaCare poses to the country. Yesterday, Governor Palin eloquently addressed some of these dangers in her letter to the New York State Senate and in her op-ed in the Wall Street Journal.

Add lower future living standards for Americans, their children, and their grandchildren, to that mounting list of dangers. We stand with Governor Palin, the true leader of the opposition, in opposing the unconscionable farce that is ObamaCare.