Debate Assignment:  Should We Never Pay Down the National Deficit or Debt (even partly)?
Bob Jensen at Trinity University


U.S. National Debt Clock ---
Also see

Should we keep increasing the government spending deficit and the national debt every year ad infinitum?

Although in these down economic times, the liberal's Keynesian hero and Nobel Prize economist, Paul Krugman, thinks recovery is stalled because the government is not massively increasing spending deficits. But he's not willing to commit himself to never reducing deficits or never paying down some of the national debt. Hence, he really does not answer the above question ---

So let's turn to a respected law professor who advocates increasing the government spending deficit and the national debt every year ad infinitum?

"Why We Should Never Pay Down the National Debt (even partly)," by Neil H. Buchanan George Washington University Law School), SSRN, 2012 ---

Calls either to balance the federal budget on an annual basis, or to pay down all or part of the national debt, are based on little more than uninformed intuitions that there is something inherently bad about borrowing money. We should not only ignore calls to balance the budget or to pay down the national debt, but we should engage in a responsible plan to increase the national debt each year. Only by issuing debt to lubricate the financial system, and to support the economy’s healthy growth, can we guarantee a prosperous future for current and future citizens of the United States.

Student Assignment

Since many of the most liberal economists are not quite willing to assert that "we should never pay down the national debt," what questionable and unmentioned assumptions have been made by Neil H. Buchanan that need to be addressed?

Are some of these assumptions unrealistic in any world other than a utopian world?

Assumption 1
Debt We Owe to Ourselves is Not Debt --- Such Debt is Really an Asset

In addition, the federal government’s debt is partly held internally, with some federal agencies holding Treasury bonds on their books as assets. The most important of these agencies is the Social Security Administration, which accounts for its accumulated annual budget surpluses by holding Treasuries, thereby lending its annual surpluses to the rest of the federal government.28 This means that the total federal debt is only partly held by parties that are not part of the federal government, creating a distinction between the total federal debt and the “debt held by the public
Buchanan, Page 687

Jensen Comment
Did Professor Buchanan ever take an accounting course? Debt that you owe to your self is not an asset. If it was an asset we could create $200 trillion in the Social Security Trust Funds by giving it $200 trillion worth of treasury bonds, thereby creating "assets" for no cost or sacrifice to the government. The fact of the matter was that at one point in time the Social Security Trust Funds held genuine assets based on the contributions of employees and their employers (that FICA tax sent to the government). But Congress in its own ignorance long ago raided those real SS Trust Fund assets and replaced them with IOUs so it could spend the FICA funds for other purposes. The IOUs are hardly the same type of assets. Debt you owe yourself is not an asset and will one day have to be replaced by genuine assets (e.g., tax increases) when the SS checks must be sent to retirees and disabled persons.

It has, nonetheless, been argued that the economic question is not whether the U.S. bonds held by Social Security represent legal obligations that will be fulfilled but whether the Trust Fund represents savings that help preclude a need to raise taxes in the future even if current taxes collected cannot support the benefits paid. This may not settle the economic question, however, since it has been contended that if the government would have paid as much or more to borrow from other sources were it not for the Fund, lower government spending was not enabled and there was accordingly no economic contribution to government savings. Complicating an analysis is the point of view adopted (if the fund lends to the rest of government at a below-market rate of interest, it represents a loss to future Social Security beneficiaries under a narrow view, but possibly a gain under a larger view since the government gains from the low cost funding and the fiscal health of the government stands behind the ultimate solvency of Social Security). Comparative borrowing assessments may also affected by crowding out effects.

Was the money added to the fund in 1980, for example, saved so that it could be spent on a retiring baby boomer in 2020 without a tax increase? If the only way for the federal government to repay the bonds held by Social Security is by raising taxes in 2020, this suggests that the excess money collected in 1980 was spent on other government activities, not saved by Social Security. However, if bonds are repaid by other borrowing, then the fund could be viewed as just one of many potential lenders to the federal government. Using this point of view, having to replace the Trust as a lender because it is recalling its loan is not evidence that the money was simply spent, but rather that lenders have shifted. If there are tax increases, those who believe the trust fund is real might also note that tax increases could have been even higher without the trust fund.

Governmental accounting is mostly done with smoke and mirrors ---

Lets just crank out trillions in assets for entitlement funds by giving them unlimited treasury bonds.
Am I missing something here?

Assumption 2
Only Health Care Costs Present a Danger to the Sustainability of Economic Prosperity Attainable Massive in Deficits and National Debt

Based on available forecasts of the federal government’s likely spending and taxing levels, only health care costs pose a serious danger of creating the kind of systemic crisis that could bring down the economic system. The remainder of the federal government’s finances, including Social Security payments during the retirement years of the Baby Boom generation, is entirely under control, with no indication that long-term borrowing needs would approach anything close to unsustainable levels.
Buchanan, Page 690

Jensen Comment
Firstly, there's a huge assumption here that health care costs can be "managed" while increasing the quality care and coverage provided to virtually all residents of the United States. Buchanan admits there's a real danger that real danger that rising health care costs will through a monkey wrench into his entire thesis. And he offers no analysis of why this won't come to pass.

Secondly, there's a huge assumption that all other government spending will not spin out of control. But his arguments are superficial to a point of being ludicrous. For example, to control serious inflation the Fed at some point may have to double artificially low interest rates. Suppose that the national debt stands at $50 trillion when interest rates averaging 3%. If these interest rates must be doubled to 6% in an attempt to bring down inflation, nearly all the $50 trillion will have to be rolled over at twice the interest cost paid out to the government's creditors.

I would argue that there are many threats other than health care costs that can spin out of control with interest on the national debt being one of them..

And this is only one type of government expenditure that can spin out of control

Professor Buchanan ignores that Congressional spending is heavily impacted by lobbying interests, each of which wants more subsidies and few of which will probably spend this money for a net increase in the GDP.

An example of how the government hands out subsidies for political rather than economic reasons are the billions given to corn ethanol producers to produce product that is totally unviable from an economic perspective. Even environmentalist Al Gore admits that corn ethanol subsidies are politically motivated disasters.

I had almost zero respect for Nobel Prize winner Al Gore's persistent advocacy of corn ethanol that takes more energy to produce than is gained. Also ethanol purportedly generates twice as much ozone as gasoline in traditional combustion engines and is absurdly expensive to transport.

I had more respect for Al Gore after he admitted that he supported corn ethanol subsidies for political reasons rather than either economic or environmental reasons.

"Al Gore's Ethanol Epiphany:  He concedes the industry he promoted serves no useful purpose"  The Wall Street Journal, November 22, 2010 --- 

Anyone who opposes ethanol subsidies, as these columns have for decades, comes to appreciate the wisdom of St. Jude. But now that a modern-day patron saint—St. Al of Green—has come out against the fuel made from corn and your tax dollars, maybe this isn't such a lost cause.

Welcome to the college of converts, Mr. Vice President. "It is not a good policy to have these massive subsidies for first-generation ethanol," Al Gore told a gathering of clean energy financiers in Greece this week. The benefits of ethanol are "trivial," he added, but "It's hard once such a program is put in place to deal with the lobbies that keep it going."

No kidding, and Mr. Gore said he knows from experience: "One of the reasons I made that mistake is that I paid particular attention to the farmers in my home state of Tennessee, and I had a certain fondness for the farmers in the state of Iowa because I was about to run for President."

Mr. Gore's mea culpa underscores the degree to which ethanol has become a purely political machine: It serves no purpose other than re-electing incumbents and transferring wealth to farm states and ethanol producers. Nothing proves this better than the coincident trajectories of ethanol and Mr. Gore's career.

Continued in article

But even in these 2012 times of severe drought in the corn belt when at last we have good reason to stop these absurd subsidies to corn ethanol producers, we have a huge example of how hard it is to shut down a wasteful industry that should be shut down entirely. It's just not politically feasible to end wasteful subsidies that millions of voters have become dependent upon over the years.

The undesirable tobacco industry is not only protected by politics it still received government subsidies. It's virtually impossible to shut a government subsidy program down not matter how undesirable or inefficient it becomes.

Assumption 3
Those few instances where the government can utilize economic resources more efficiently (than private industry) are not offset where government massively burns up economic resources due to waste, inefficiency, and fraud.

It is important to remember, however, that the government can sometimes use economic resources in more productive ways than those resources would have been used by private businesses. When the government engages in productive investment, such as building the infrastructure that allows private commerce to flourish, that spending more than pays for itself. For example, the best recent economic research indicates that each dollar spent to prevent students from dropping out of school before receiving their high school diplomas results in a return to the government of between $1.45 to $3.55, saving approximately $90 billion for each year that the government succeeds in halving dropout rates from current levels.
Buchanan, pp. 691-692

Jensen Comment
Perhaps there are instances where the government can be more productive than private industry, but private industry generally faces a market discipline that government does not face, thereby leading to countless areas where the government squanders resources in ways that are unimaginable in private industry. For example, the Pentagon has no idea how much total inventory it has or how many hundreds of billions of this inventory is lost, stolen, or outdated. The GAO says some enormous government agencies are unauditable, including the Pentagon and the IRS. And hence these agencies operate without audits that make the agencies accountable for lost resources.

Thus those rare instances where the government is more productive in terms of resources are massively overcome by instances where the government spending is out of control  A good example, is the Medicare reimbursements to clever thieves bill the system over and over again with phony claims such as claims for equipment and medication that never existed. Another example, is the lifetime disability and Medicare coverage awarded to millions of people who are not truly disabled. Still another example, is the billions of tax refunds given to crooks with phony IDs.

And that $90 billion return arising from preventing school dropouts is predicated on the assumption that there is a legitimate economic opportunity for those drop outs and a great desire on their parts to be productive. Many of those dropouts are not and never will have the aptitude or motivation or opportunity to become anything more than they would have been without high school diplomas that in most instances are now given out to anybody who shows up regularly for class. That of course does not mean we should encourage dropping out in order to be more efficient with school budgets. I'm not saying this at all. But it's not clear that we should spend a million dollars of government funding on each and every potential dropout.

Assumption 4
If the government were to adopt the Golden Rule in its budgeting every trillion dollars added to the deficit will return more than a trillion dollars

With these considerations in mind, economists have devised a budget rule that maximizes long-term economic growth, dubbing it the “Golden Rule.” Under the Golden Rule, the federal government would borrow money to finance its spending on productive investments, and it would collect enough taxes to cover its other spending, including interest payments on the debt, on a cyclically-adjusted basis—that is, after allowing for increased deficits during economic downturns.
Buchanan, pp. 692-693

Jensen Comment
This all hinges on the assumption that there are opportunities for such trillion dollar returns and that the government can implement this level of spending efficiently and effectively to achieve such long-term returns. The evidence, however, is just the opposite. Instead the government is coaxed by hucksters to invest in enterprises only to discover, belatedly, that other nations in the global economy are more effective and efficient in those enterprises. An example from above are the massive subsidies given to corn ethanol producers when in fact the sugar cane ethanol producers in Brazil produce a sugar cane ethanol product that is much more cost effective because sugar cane ethanol is much more chemically superior to corn ethanol.

Professor Buchanan also ignores time value of money when he throws out the phrase "long-term." For example, investing trillions to colonize Mars or the moon may commence to yield returns in 200 years, but in the meantime annual interest is paid on the debt over 200 years to fund this "long-term productive investment."

What Professor Buchanan fails to mention is that government funding often is necessary when there are externalities that make the investments good things for uneconomic reasons. For example, spending $1 billion per child to develop a drug to save the lives of 100 children over a 10-year horizon may have ethical  and humane benefits but certainly not economic benefits.

The government is intended to provide funding for many good things that would not be profitable to produce in the business world.

Professor Buchanan downplays austerity in favor of deficit financing. but he never mentions California or the PIGS nations in Europe that have with massive debt that has reached or nearly-reached junk status. Governments that are not allowed to inflate their way out of debt default by printing currency have little choice other than austerity unless they are saved by other governments. In order to inflate its way out of default Greece, for example, will have to withdraw from the Euro Zone and California will have to withdraw from the Dollar Zone so they can print unlimited amounts of their own currencies.

Professor Buchanan assumes that the National Debt of the United States has no limits such that its possible to have no austerity and unlimited trillions of National Debt without having to fear junk status of U.S. Treasury bonds. I don't know any respected economist that supports this assumption. The Fed has already purchased over $2 trillion in U.S. Treasury bonds, which is tantamount to printing greenbacks to spend rather than tax or borrow. Even though the government in the 1990s redefined inflation (by throwing out food and fuel price increases) while keeping in the depressed housing costs so as to hide how bad inflation is growing, the economic recovery so slow that inflation has not really jumped like it will if the Fed continues to print money when recovery finally arrives.

Assumption 5
If deficits threatening the rollover of National Debt as sustainable rates of interest, the threat can be averted by raising taxes on the wealthy

Moreover, if the worst-case forecasts of spiraling health care costs turn out to be true, there is nothing that could be done elsewhere in the budget to avert catastrophe. The best long-term path would include increased taxes on the wealthiest Americans, which would allow the government to finance the rest of its operations (other than health care) easily for decades to come.
Buchanan, pp. 690-691

This is the typical assumption of the liberals that the wealthy people are a piñata that when, banked with a taxation stick, will shower down all the money that 's needed to restore prosperity in dire times. This might've been somewhat the case when the deficits of the U.S. were under $1 trillion. But in Buchanan's scenario that deficits can keep rising by trillions upon trillions, it's not at all clear that confiscating the entire incomes of high income taxpayers would even cover increased interest costs on the debt.

At present we're already sticking it to the rich.
"CBO: The wealthy pay 70 percent of taxes," by Stephen Dinan, The Washington Times, July 10, 2012 ---

And most other nations are finding that lowering their highest marginal tax rates increased GDP.
Marginal Tax Rate Declines in the Rest of the World ---

Table 1 Maximum Marginal Tax Rates on Individual Income
*. Hong Kong�s maximum tax (the �standard rate�) has normally been 15 percent, effectively capping the marginal rate at high income levels (in exchange for no personal exemptions).
**. The highest U.S. tax rate of 39.6 percent after 1993 was reduced to 38.6 percent in 2002 and to 35 percent in 2003.

  1979 1990 2002
Argentina 45 30 35
Australia 62 48 47
Austria 62 50 50
Belgium 76 55 52
Bolivia 48 10 13
Botswana 75 50 25
Brazil 55 25 28
Canada (Ontario) 58 47 46
Chile 60 50 43
Colombia 56 30 35
Denmark 73 68 59
Egypt 80 65 40
Finland 71 43 37
France 60 52 50
Germany 56 53 49
Greece 60 50 40
Guatemala 40 34 31
Hong Kong 25* 25 16
Hungary 60 50 40
India 60 50 30
Indonesia 50 35 35
Iran 90 75 35
Ireland 65 56 42
Israel 66 48 50
Italy 72 50 52
Jamaica 58 33 25
Japan 75 50 50
South Korea 89 50 36
Malaysia 60 45 28
Mauritius 50 35 25
Mexico 55 35 40
Netherlands 72 60 52
New Zealand 60 33 39
Norway 75 54 48
Pakistan 55 45 35
Philippines 70 35 32
Portugal 84 40 40
Puerto Rico 79 43 33
Russia NA 60 13
Singapore 55 33 26
Spain 66 56 48
Sweden 87 65 56
Thailand 60 55 37
Trinidad and Tobago 70 35 35
Turkey 75 50 45
United Kingdom 83 40 40
United States 70 33 39**

Source: PricewaterhouseCoopers; International Bureau of Fiscal Documentation.



Jensen Conclusion
It's easy to understand why Professor Buchanan is a law school professor and not a professor of economics. I don't know of a single economist who advocates never running (at least in part) the national debt.


"Why 'New York Times' Economist Paul Krugman Is Partly Right But Mostly Wrong," by Michael T. Snyder, Seeking Alpha, May 3, 2012 ---

In recent days, New York Times economist Paul Krugman has been doing a whole bunch of interviews in which he has declared that the solution to our economic problems is very easy. Krugman says that all we need to do to get the global economy going again is for the governments of the world to start spending a lot more money.

Krugman believes that austerity is only going to cause the economies of the industrialized world to slow down even further and therefore he says that it is the wrong approach. And you know what? Krugman is partly right about all of this. The false prosperity that the United States and Europe have been enjoying has been fueled by unprecedented amounts of debt, and in order to maintain that level of false prosperity we are going to need even larger amounts of debt. But there are several reasons why Krugman is mostly wrong.

First of all, we have not seen any real "austerity" yet. Even though there have been some significant spending cuts and tax increases over in Europe, the truth is that nearly every European government is still piling up more debt at a frightening pace. Here in the United States, the federal government continues to spend more than a trillion dollars a year more than it brings in. If the United States were to go to a balanced federal budget, that would be austerity.

What we have now is wild spending by the federal government beyond anything that John Maynard Keynes ever dreamed of. Secondly, Krugman focuses all of his attention on making things more comfortable for all of us in the short-term without even mentioning what we might be doing to future generations. Yes, more government debt would give us a short-term economic boost, but it would also make the long-term financial problems that we are passing on to our children even worse.

It is important to understand that Paul Krugman is a hardcore Keynesian. He believes that national governments can solve most economic problems simply by spending more money. His prescription for the U.S. economy in 2012 was summarized in a recent Rolling Stone article:

The basic issue, says Krugman, is a lack of demand. American consumers and businesses, aren't spending enough, and efforts to get them to open their wallets have gone nowhere. Krugman's solution: The federal government needs to step in and spend. A lot. On debt relief for struggling homeowners; on infrastructure projects; on aid to states and localities; on safety-net programs. Call it "stimulus" if you like. Call it Keynesian economics, after the great economic thinker (and Krugman idol) John Maynard Keynes, who first championed the idea that government has an essential role in saving the free market from its own excesses.

So, is Krugman right? Would the U.S. economy improve if the federal government borrowed and spent an extra half a trillion dollars this year for example? Yes, it would. But it would also get us half a trillion dollars closer to bankruptcy as a nation.

Krugman claims that "austerity" has failed, but the truth is that we have not even seen any real "austerity" yet. When a government spends more than it brings in, that is not real austerity. People talk about the "austerity" that we have seen in places such as Greece and Spain, but the truth is that both nations are still piling up huge amounts of new debt. So let's not pretend that the western world is serious about austerity.

The goal for most European nations at this point is to get their debts down to "sustainable" levels. But for economists such as Krugman, this is a very bad idea. Krugman insists that cutting government spending during a recession is a very stupid thing to do. The following is from one of his recent articles in the New York Times:

For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.

Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.

Yes, Krugman is correct that government austerity measures will only make a recession worse. Just look at what has happened in Greece. Wave after wave of austerity measures has pushed Greece into an economic depression. If you want to see what austerity has done to the unemployment rate in Greece, just check out this chart.

As other nations across Europe have taken measures to get debt under control, we have seen similar economic results all across the continent. The overall unemployment rate in the eurozone has hit 10.9 percent which is a new all-time high, and youth unemployment rates throughout Europe are absolutely skyrocketing.

Right now there are already 12 countries in Europe that are officially in a recession, and in many European nations manufacturing activity is slowing down dramatically. So, yes, austerity is not helping short-term economic conditions in Europe.

But what are the nations of the western world supposed to do? According to Krugman, they are supposed to run up gigantic amounts of new debt indefinitely. And that is what the United States is doing right now. But at some point the clock strikes midnight and all of a sudden you have become the "next Greece". U.S. government debt is already rising much, much faster than U.S. GDP is.

Between 2007 and 2010, U.S. GDP grew by only 4.26 percent, but the U.S. national debt soared by 61 percent during that same time period. Today, the U.S. national debt is equivalent to 101.5 percent of U.S. GDP. But Paul Krugman does not consider this to be a major problem.

The Obama administration is currently stealing approximately 150 million dollars from our children and our grandchildren every single hour to finance our reckless spending, but for Paul Krugman that is not nearly good enough. To Krugman, the only thing that is important is what is happening right now. Apparently the future can be thrown into the toilet as far as he is concerned.

The founder of PIMCO, Bill Gross, told CNBC on Tuesday that the U.S. government is likely to be hit with another credit rating downgrade this year if something is not done about our exploding debt.

The United States already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain does. But Krugman insists that the solution to our economic problems is even more debt and even more spending.

In a previous article, I detailed how we are doomed if the U.S. government keeps spending money wildly like this and we are doomed if the U.S. governments stops spending money wildly like this.

If we keep running trillion dollar deficits every year, at some point our financial system will collapse, the U.S. dollar will fail, and we will essentially be facing national bankruptcy.

But if the federal government stops borrowing and spending money like this, our debt-fueled prosperity will rapidly disappear, unemployment will shoot well up into double digits, and we will soon have mass rioting in major U.S. cities.

The truth is that we have already been following Paul Krugman's economic prescription for the nation for decades. Our 15 trillion dollar party has funded a standard of living unlike anything the world has ever seen, but the party is coming to an end.

The Federal Reserve is trying to keep the party going by buying up huge amounts of government debt. The Fed actually purchased approximately 61 percent of all government debt issued by the U.S. Treasury Department in 2011.

It is a shell game that cannot go on for too much longer. The national debt crisis can be delayed for a while, but at some point the house of cards is going to come crashing down on top of us all.


"Pending Collapse of the United States" ---

"TOP TEN MYTHS OF MEDICARE," by Richard L. Kaplan, The Elder Law Journal, Vol. 20, No.1, 2012 ---

In the context of changing demographics, the increasing cost of health care services, and continuing federal budgetary pressures, Medicare has become one of the most controversial federal programs. To facilitate an informed debate about the future of this important public initiative, this article examines and debunks the following ten myths surrounding Medicare: (1) there is one Medicare program, (2) Medicare is going bankrupt, (3) Medicare is government health care, (4) Medicare covers all medical cost for its beneficiaries, (5) Medicare pays for long-term care expenses, (6) the program is immune to budgetary reduction, (7) it wastes much of its money on futile care, (8) Medicare is less efficient than private health insurance, (9) Medicare is not means-tested, and (10) increased longevity will sink Medicare.

Jensen Comment
I don't agree with every conclusion in this paper, but it is one of the best summaries of Medicare that I can recommend.

Waste, Fraud, and Abuse:  The gap between payments and payees in Medicare makes it a criminal's piñata

It should be emphasized at the outset that this contention is not about the ever-present specter of “waste, fraud, and abuse” that haunts governmental programs generally. That Medicare is targeted by scammers and schemers of all sorts is both indisputable and hardly surprising. As the famed bank robber, Willie Sutton, reportedly replied when asked why he robbed banks: “That’s where the money is.”101 Indeed, Medicare is where the money is—specifically $509 billion in fiscal year 2010 alone.102 Any program that pays out this amount of money to a wide variety of service providers in literally every county in America will be very difficult to police. That reality notwithstanding, such violations of the public trust as are encapsulated in the phrase “waste, fraud, and abuse” should be ferreted out whenever possible and eliminated. No one excuses these leakages, just as no one has a sure-fire solution to stem them once and for all.
Kaplan, Page 19

One thing to think about is why Medicare may be losing hundreds of billions of dollars relative to the national health care plans of Canada, Europe, etc. The obvious thing to pick on is that Medicare is a third party payment system where medical services, medications, equipment such as battery-powered scooters and home hospital beds, and medical care centers are not directly managed by the government. This opens the door to millions of fraudulent claims, often by extremely clever criminals, unscrupulous physicians, etc. The gap between payments and payees in Medicare makes it more vulnerable to abuse and waste.

This and other articles make a big deal about how administrative costs of Medicare are significantly less that the administrative costs of private insurance carriers like Blue Cross. However, what this article and related articles almost always fail to mention is that the major component of administrative cost to companies like Blue Cross lies in operating controls to prevent waste, fraud, and abuse.

National plans like those in Canada have both lower administrative costs and less waste, fraud, and abuse because the government provides most of the services directly without the moral hazards that arise from the gap between funding and delivery of services. Personally, I favor national plans. Of course, in some nations like Germany  there are premium alternatives where people that can afford it can pay for premium services not covered in the national plans.


Futile Care Waste:  My former University of Maine colleague was given thirty days to live (because of Stage Four bone cancer) received two new hips but never walked again and died in less than two weeks

But the issue of “futile care” is very different from “waste, fraud, and abuse.” The claim that Medicare should not pay for pointless medical interventions presumes that funds were indeed spent on actual medical procedures. The issue is whether those procedures should not have been done for reasons of inefficacy or insufficient “bang for the buck.” It is certainly true that Medicare spends a disproportionate amount of its budget on treatments in the final months of its beneficiaries’ lives. Some twenty-eight percent of the entire Medicare budget is spent on medical care in enrollees’ final year of life,103 and nearly forty percent of that amount is spent during a patient’s last month. The critical issue, of course, is whether these expenditures are pointless.

In one respect, it is not surprising that the cost of a person’s final medical episode is unusually expensive. That person’s presenting condition must have been especially severe because he or she did in fact die during or shortly after treatment. Moreover, when circumstances are particularly bleak, more intensive and often much more expensive procedures, tests, and interventions seem appropriate. After all, the patient was literally fighting off death at that point, so medical personnel try everything in their armamentarium to win what was ultimately the patient’s final battle. Only after the fact does one know that the battle in question was indeed the patient’s last episode. Does that mean that the effort expended, and the attendant costs, were wasted?

This question is more difficult than some might suspect. A recent study of Medicare claims data examined the association between inpatient spending and the likelihood of death within thirty days of a patient’s being admitted to a hospital.It found that for most of the medical conditions examined, including surgery, congestive heart failure, stroke, and gastrointestinal bleeding, a ten percent increase in inpatient spending was associated with a decrease in mortality within thirty days of 3.1 to 11.3%, depending upon the specific medical condition in question. Only for patients who presented with acute myocardial infarction was there no association of increased inpatient spending and improved outcomes. Thus, the authors concluded, “the amount [of waste] may not be as large as commonly believed, at least for hospitalized Medicare patients.” To be sure, the results might not be as encouraging in non-hospital settings, but Medicare does not cover the cost of nursing home patients who are lingering at death’s door while receiving “custodial care.”In any case, hospital costs represent the single largest component of Medicare’s expenditures— fully twenty-seven percent in the most recent year for which such data are available.

That is not to say that some of Medicare’s expenditures near the end of beneficiaries’ lives provide insufficient benefit to justify their cost. But the tough questions are how to determine those wasteful expenditures in advance and who should make that determination. Such considerations are beyond the scope of this Article,but suffice it to note that end-of-life care discussions are extraordinarily contentious and easily demagogued. After all, former Vice Presidential candidate Sarah Palin effectively scuttled a rather benign effort to include payment for end-of-life counseling in Medicare’s newly provided “annual wellness visit[s]” by contending that such counseling was a first step to rationing health care by “death panels” run by government bureaucrats. Thus, while patients can individually indicate in advance how much treatment they want at the end of their lives, any comprehensive effort to root out Medicare’s wasteful expenditures on “futile care” might face serious political opposition.

In any case, an authoritative analysis published in The New England Journal of Medicine concluded that “the hope of cutting the amount of money spent on life-sustaining interventions for the dying in order to reduce overall health care costs is probably vain.” The authors noted that “there are no reliable ways to identify the patients who will die” and that “it is not possible to say accurately months, weeks, or even days before death which patients will benefit from intensive interventions and which ones will receive ‘wasted’ care.” That leaves age-based rationing of care or more precisely, denial of medical services on the basis of chronological age, as the only easily implemented pathway to eliminate what some might regard as inefficacious expenditures of medical resources. Such age-based rationing of health care is practiced in other national health care systems, even though studies of prognostic models have demonstrated that “age alone is not a good predictor of whether treatment will be success ful.” In any case, polls of Americans have shown little support and significant opposition to the concept. One survey undertaken in late 1989 sought agreement with the following statement: “Lifeextending medical care should be withheld from older patients to save money to help pay for the medical care of younger patients.” Only 5.7% of respondents under age sixty-five strongly agreed with this statement while 38.3% of that group strongly disagreed with it.120 Interestingly, among respondents who were themselves age sixty-five and older, the gap between these opposing viewpoints was narrower: 8.8% strongly agreed with the statement in question while 35.4% strongly disagreed.

Whether results would be substantially different today when the range of medical interventions has increased significantly and when the nation’s budgetary situation has worsened considerably is an open question. Yet, when the 2010 health care reform legislation created an Independent Payment Advisory Board to reduce Medicare’s expenses, the enabling statute was explicit that this Board may not make proposals that would “ration health care.” Clearly, the prospect of eliminating Medicare expenditures that are medically futile will not be an easy task to accomplish.
Kaplan, pp. 19-22

Jensen Comment
My former Unive
rsity of Maine colleague on Medicare was given thirty days to live (because of Stage Four bone cancer) received two new hips but never walked again and died in less than two weeks. I don't think he would've received those two useless and very expensive hips on any of the national plans of Canada or Europe.


Where Did Medicare Go So Wrong?
Medicare is a much larger and much more complicated entitlement burden relative to Social Security by a ratio of about six to one or even more. The Medicare Medical Insurance Fund was established under President Johnson in1965.

Note that Medicare, like Social Security in general, was intended to be insurance funded by workers over their careers. If premiums paid by workers and employers was properly invested and then paid out after workers reached retirement age most of the trillions of unfunded debt would not be precariously threatening the future of the United States. The funds greatly benefit when workers die before retirement because all that was paid in by these workers and their employers are added to the fund benefits paid out to living retirees.

The first huge threat to sustainability arose beginning in 1968 when medical coverage payments payments to surge way above the Medicare premiums collected from workers and employers. Costs of medical care exploded relative to most other living expenses. Worker and employer premiums were not sufficiently increased for rapid growth in health care costs as hospital stays surged from less than $100 per day to over $1,000 per day.

A second threat to the sustainability comes from families no longer concerned about paying up to $25,000 per day to keep dying loved ones hopelessly alive in intensive care units (ICUs) when it is 100% certain that they will not leave those ICUs alive. Families do not make economic choices in such hopeless cases where the government is footing the bill. In other nations these families are not given such choices to hopelessly prolong life at such high costs. I had a close friend in Maine who became a quadriplegic in a high school football game. Four decades later Medicare paid millions of dollars to keep him alive in an ICU unit when there was zero chance he would ever leave that ICU alive.

On November 22, 2009 CBS Sixty Minutes aired a video featuring experts (including physicians) explaining how the single largest drain on the Medicare insurance fund is keeping dying people hopelessly alive who could otherwise be allowed to die quicker and painlessly without artificially prolonging life on ICU machines.
"The Cost of Dying," CBS Sixty Minutes Video, November 22, 2009 ---;lst;1  

What is really sad is the way Republicans are standing in the way of making rational cost-benefit decisions about dying by exploiting the "Kill Granny" political strategy aimed at killing a government option in health care reform.
See the "Kill Granny" strategy at ---

The third huge threat to the economy commenced in when disabled persons (including newborns) tapped into the Social Security and Medicare insurance funds. Disabled persons should receive monthly benefits and medical coverage in this great land. But Congress should've found a better way to fund disabled persons with something other than the Social Security and Medicare insurance funds. But politics being what it is, Congress slipped this gigantic entitlement through without having to debate and legislate separate funding for disabled persons. And hence we are now at a crossroads where the Social Security and Medicare Insurance Funds are virtually broke for all practical persons.

Most of the problem lies is Congressional failure to sufficiently increase Social Security deductions (for the big hit in monthly payments to disabled persons of all ages) and the accompanying Medicare coverage (to disabled people of all ages). The disability coverage also suffers from widespread fraud.

Other program costs were also added to the Social Security and Medicare insurance funds such as the education costs of children of veterans who are killed in wartime. Once again this is a worthy cause that should be funded. But it should've been separately funded rather than simply added into the Social Security and Medicare insurance funds that had not factored such added costs into premiums collected from workers and employers.

The fourth problem is that most military retirees are afforded full lifetime medical coverage for themselves and their spouses. Although they can use Veterans Administration doctors and hospitals, most of these retirees opted for the underfunded  TRICARE plan the pushed most of the hospital and physician costs onto the Medicare Fund. The VA manages to push most of its disabled veterans onto the Medicare Fund without having paid nearly enough into the fund to cover the disability medical costs. Military personnel do have Medicare deductions from their pay while they are on full-time duty, but those deductions fall way short of the cost of disability and retiree medical coverage.

The fifth threat to sustainability came when actuaries failed to factor in the impact of advances in medicine for extending lives. This coupled with the what became the biggest cost of Medicare, the cost of dying, clobbered the insurance funds. Surpluses in premiums paid by workers and employers disappeared much quicker than expected.

A sixth threat to Medicare especially has been widespread and usually undetected fraud such as providing equipment like motorized wheel chairs to people who really don't need them or charging Medicare for equipment not even delivered. There are also widespread charges for unneeded medical tests or for tests that were never really administered. Medicare became a cash cow for crooks. Many doctors and hospitals overbill Medicare and only a small proportion of the theft is detected and punished.

The seventh threat to sustainability commenced in 2007 when the costly Medicare drug benefit entitlement entitlement was added by President George W. Bush. This was a costly addition, because it added enormous drains on the fund by retired people like me and my wife who did not have the cost of the drug benefits factored into our payments into the Medicare Fund while we were still working. It thus became and unfunded benefit that we're now collecting big time.

In any case we are at a crossroads in the history of funding medical care in the United States that now pays a lot more than any other nation per capita and is getting less per dollar spent than many nations with nationalized health care plans. I'm really not against Obamacare legislation. I'm only against the lies and deceits being thrown about by both sides in the abomination of the current proposed legislation.

Democrats are missing the boat here when they truly have the power, for now at least, in the House and Senate to pass a relatively efficient nationalized health plan. But instead they're giving birth to entitlements legislation that threatens the sustainability of the United States as a nation.

In any case, The New York Times presents a nice history of other events that I left out above ---

"THE HEALTH CARE DEBATE: What Went Wrong? How the Health Care Campaign Collapsed --
A special report.; For Health Care, Times Was A Killer," by Adam Clymer, Robert Pear and Robin Toner, The New York Times, August 29, 1994 --- Click Here

November 22, 2009 reply from Richard.Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

The electorate's inability to debate trade-offs in a sensible manner is the biggest problem, in my view. See 

Richard Sansing

The New York Times Timeline History of Health Care Reform in the United States ---
Click the arrow button on the right side of the page. The biggest problem with "reform" is that it added entitlements benefits without current funding such that with each reform piece of legislation the burdens upon future generations has hit a point of probably not being sustainable.

Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 ---

. . .

In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

. . .

Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

Continued in article

This is now President Obama's problem with or without new Obamacare entitlements that are a mere drop in the bucket compared to the entitlement obligations that President Obama inherited from every President of the United States since FDR in the 1930s. The problem has been compounded under both Democrat and Republican regimes, both of which have burdened future generations with entitlements not originally of their doing.

Professor Niall Ferguson and David Walker are now warning us that by year 2050 the American Dream will become an American Nightmare in which Americans seek every which way to leave this fallen nation for a BRIC nation offering some hope of a job, health care, education, and the BRIC Dream.

Bob Jensen's threads on health care ---

Bob Jensen's threads on entitlements ---

Debt ---

History of Money and Debt ---

Debt (booked by accountants) versus Entitlements (promises made that are not yet booked) ---

"We've Always Been Deadbeats Debt is not a new American way," by Scott Reynolds Nelson, Chronicle of Higher Education, September 10, 2012 ---

My father was a repo man. He did not look the part, which made him all the more effective. He alternately wore a long mustache or a shaggy beard and owned bell-bottoms in black, blue, and cherry red. His imitation-silk shirts were festooned with city maps, cartoon characters, or sailing ships. Dad sang in the car, at the top of his lungs, mostly obscure show tunes. His white Dodge Dart had Mach 1 racing stripes that he had lifted from a souped-up Ford Mustang. The "deadbeats" saw him coming, that's for sure, but they did not understand his profession until he walked into their homes and took away their televisions.

Dad worked for Woolco, a company that lent appliances on an installment plan. When borrowers failed to pay, ignored the letters and phone calls, my father would come by. He often posed as a meter reader or someone with a broken-down car. If he saw a random object lying abandoned in the yard, he would pick it up and bring it to the door as if he were returning it. He was warm and funny, charming, but pushy. He did not carry a gun, but he was fearless under pressure and impervious to verbal abuse. If the door opened, he was inside; if he was inside, he shortly had his hands on the appliance; the rest was bookkeeping.

. . .

In each case, lenders had created complex financial instruments to protect themselves from defaulters like the ones I watched from the car. And in each case, the very complexity of the chain of institutions linking borrowers and lenders made it impossible for those lenders to distinguish good loans from bad.

In 1837, for example, banks in the north of England discovered that the unpaid "cotton bills of exchange" in their vaults made them the indirect owners of slaves in Mississippi. In 2007, shareholders in DBS, the largest bank in Singapore, found themselves part owners of homes facing foreclosure in California, Florida, and Nevada. In both cases, efficient foreclosure proved impossible.

In those crashes in America's past, perhaps a repo man in a Dodge Dart with a million gallons of gas could have visited every debtor, edged his way in, and decided who was good for it. (My dad did accept cash or money orders for Woolco's goods.) But big lenders have neither the time nor the capacity to act with the diligence of a repo man. Instead, such lenders (let's agree to call them all banks) try to unload debts, hide from their own creditors, go into bankruptcy, and call on state and federal institutions for relief. Banks have also routinely overestimated the collateral—the underlying asset—for the loans they hold. When those debts go unpaid or appear unpayable, banks quickly withdraw lending; the teller's window slams shut. A crisis on Wall Street becomes a crisis on Main Street. Money is tight. Loans are impossible: Crash.


Scholarship on these financial downturns has its own long and checkered past.

From the 1880s to the 1950s, scholars told the history of the nation's economic downturns as the history of banks. Such an approach was not entirely wrong, but it tended to focus on big personalities like J.P. Morgan or New York institutions; it tended to ignore the farmers, artisans, slaveholders, and shopkeepers whose borrowing had fed the booms and busts.

Then, in the 1960s and 1970s, the so-called new economic historians (or cliometricians) came along with a different story. Using state and federal data, they tried to build mathematical models of the nation's financial health. Moving beyond banks, they emphasized what they termed the "real economy," by which they meant measurable indices of growth and profit. Taking the nation's health like a simple temperature reading, they used gross domestic product, gross income, or collective return on investment. Of course, none of those figures had been measured directly before the 1930s, and so the prognoses tended to vary widely.

Such economic models of financial health, however scientific they looked, tended to be abstract representations of an economy that was, in fact, more complex and more interconnected than they pictured. The models, for example, often assumed that old banks were like modern banks, sharing common accounting principles, or that because banks first issued credit cards in the 1960s, they offered no consumer credit before then. Drilling into historical documents for seemingly relevant numbers, then plugging those numbers into a model of a world they understood rather than the economy they sought to describe, the cliometricians often produced ahistorical work. Hence, one economic historian assumed that American barrels of flour sent to New Orleans were consumed in the South, though most were bound for re-export to the Caribbean. Another calculated that railroads played little role in America's economic booms by modeling a scenario in which canals could have (somehow) crossed the arid plains into the Sierra Nevada mountains.

Bear in mind, that same kind of intellectual hubris about models of economic behavior had awful effects in the recent past. Around 2000, Barclays Bank borrowed a simple diffusion model from physics (called the "Gaussian copula function") to suggest that foreclosures would have a relatively small effect on nearby property values. Economists tested it with two years of foreclosure and price data and agreed. Billions of investment in real-estate followed, often in indirect markets like real-estate derivatives and collateralized debt obligations. By 2008 the model proved shockingly inaccurate.

If some historians focused on the temperature of the "real economy," economists were becoming obsessed with the money supply as the single factor explaining most American panics. Again, a certain kind of blindness to the history of debt and deadbeats ensued. The most important book here was Milton Friedman and Anna Jacobson Schwartz's seminal A Monetary History of the United States, 1867-1960 (1963). It urged economists to steer away from stories of speculation spun out by Keynesians like John Kenneth Galbraith.

How, according to Friedman and Schwartz, can we separate speculation and investment? All loans are risky. The riskier they are, the higher the return. Some investments will fail. Markets need to clear, and those buyers who come along to sweep up bargains are not ruthless profiteers but simply maximizers who make markets work. Thus, the pair steered economists away from problems of risk and toward the problems of state intervention. They were the prophets of financial deregulation.

Their story about past financial panics had the advantage of suggesting simple solutions: Use the Federal Reserve to inflate or deflate the currency. For them, financial crises were mostly monetary. Thus, the 1929 downturn started with a financial shock and then was prolonged by an overly tight monetary policy. After A Monetary History became gospel, economics textbooks dropped their numerous chapters on financial panics because the policy solution became so clear; economists trained after 1965 know little about financial downturns before the Great Depression.

Yet a tripling of the money supply has still not fully pulled the United States and the rest of the world out of our current financial crisis—suggesting that our problems, and all the previous ones, were not just monetary. My dad would have pointed out that economists have misunderstood the problem. Crises are mostly about productive assets—the promises in his trunk.

Social historians (and I count myself among them) tell a very different story about financial panics, but we have our own blind spots. Since the late 1960s, we have often discussed the American economy as if farmers were coherent families of self-sufficient yeomen surprised by the market economy. That story of a sudden revolution misses the early and intimate relationship between Americans and credit. It overlooks how American stores provided consumer credit to farmers, plantations owners, and renters who settled the West.

Thus, American social historians have used the term "market revolution" to describe the period after the 1819 panic. Accordingly market forces rushed in as repo men like my dad became vanguards of a new capitalist order. The financial jeremiads of Jacksonian Democrats of the 1820s and 30s against bankers and paper money became the natural outgrowth of frontier farmers' anger at a capitalism they had never seen before. But the store system of Andrew Jackson's day borrowed practices from the colonial store system that goes back to the 17th century, if not earlier. It was how the fur-trading and East and West India companies prospered. John Jacob Astor and Andrew Jackson were cut from the same cloth. They made their fortunes from their stores, and their store system made settlement possible.

Part of the reason we overlook the importance of credit in American history is our continued attachment to Marx's divide between precapitalist and capitalist forms of agriculture. That misses the relationship between farming and credit for most of the people who settled America. The more I study panics, the more I am persuaded that the pioneer American institution of the 18th and early 19th centuries was not the homestead or the trapper's shack but the store, an institution that sold foreign goods to farmers on credit, taking payment in easily movable settler products like furs, potash, barrel hoops, and butter.

Rather than imagining some golden age of subsistence, scholars in the Marxist tradition should look more closely at anticapitalist movements in the wake of panics. I include here not just the utopian and religious communities like Quakers, Shakers, and Oneidans but also the early Mormons, the Grangers, and the Populists. Those people understood what it meant for banks, and then railroads, to extend credit through stores. Often regarding capital as a collective inheritance, they built their own associations to replace such institutions of credit (and the railroad was an institution of credit) with locally managed cooperatives that distributed agricultural benefits in a way that served the broader community. The temple, the elevator, and the cooperative were attempts to break the chain of debt without demonizing capital.

From the perspective of business history, Joseph A. Schumpeter argued that business-cycle downturns came from periods of "creative destruction" in which new technologies undermined old ones. Outdated technologies, with millions invested in them, became instantly obsolete, leading to financial failures that cascaded to other industries. While Schumpeter, who died in 1950, once persuaded me, I think there is a mechanistic fallacy in the argument. Railroads, for example, have taken the blame for the 1857, 1873 and 1893 downturns. While there may be something there, the whole account seems reductive and technologically determinist. For example, canals, the Bessemer process, fractional distillation of oil, and washing machines are all revolutionary technologies that flourished during the American panics, not before them. They did sweep away older technologies, but rather than causing panics those technologies benefited by the uncertainty that panic created.

In a very different camp, neo-Marxists like Giovanni Arrighi and David Harvey betray a similar kind of reductive history, a latter-day Schumpeterianism. Their work posits a "spatial fix," a center of capitalism that then organizes and draws tribute from the rest of the world. For the late Arrighi, it was a kind of pump that sucked assets from elsewhere as states were forming throughout the sweep of centuries. For Harvey it is an investment in a capital city (Amsterdam, London, New York) and a new communication technology (telegraph, telephone, the Internet) that drew higher profits from everywhere else. Dutch and British hegemony became American hegemony after World War II. That suggests that these scholars have not really considered the tremendous influence of the U.S. Federal Reserve in reorienting international trade between 1913 and the 1920s. Their story seems more or less political to me: American empire comes when Americans claim victory in World War II. The economic material seems to be used in the service of a story about the rise and decline of empires.

If we follow the money, the American empire emerged during World War I, when the international flow of debt changed drastically. For Arrighi and Harvey, the International Monetary Fund and the World Bank are the pathbreakers of financial empire. But it is worth remembering that those institutions were explicitly designed to restrain the dirty tricks of financial empires of the 1920s and 1930s: No more American banks using gunboat diplomacy in Peru; no more Germans sending tanks into Poland to collect unpaid debts.


As a historian, I have learned the most about financial disasters from long-dead historians whose work blended primary, secondary, and quantitative material. Rosa Luxemburg, William Graham Sumner, Frank W. Taussig, and Charles Kindleberger would never have agreed about anything. Luxemburg, a renegade Marxist who read in five languages, described how the dangerous mix of a hierarchical production process with the anarchy of international trade could lead manufacturers to block free trade and embrace higher prices for their raw materials in the wake of a panic. Sumner, a laissez-faire Social Darwinist who argued that income inequality benefited society, carefully explained how drastic economic changes could follow from tiny changes in international trade deals. Put in a room together, each would have retreated to a corner to begin throwing furniture. But they and the others were storytellers who used a mixture of sources. Telling a story by looking through the trunk of assets and watching the damage afterward makes more sense to me than simple models of financial contagion, money supply, technological watersheds, or global fixes.

My father died before I started writing about financial panics, but my thoughts have grown out of our 30-year-long argument about financial downturns. Not surprisingly, he disliked "deadbeats," seeing them as the people whose false promises weakened our country. He probably had a point, and no doubt the executives of Woolco would agree. But I find much in them to admire, for defaulters are often dreamers. Viewing America's financial panics through the lens of numerous unfulfilled and forgotten debts that even the oldest banker cannot possibly remember can afford a perspective my dad would have appreciated: with my view from the Dodge Dart, the minute he rang the doorbell, when both debtor and creditor prepared their stories.

Scott Reynolds Nelson is a professor of history at the College of William and Mary. His book A Nation of Deadbeats: An Uncommon History of America's Financial Disasters has just been published by Alfred A. Knopf.

"Debt: The First 5,000 Years," by Paul Kedrosky ,, September 10, 2011 --- Click Here

Debt versus Equity ---

The booked National Debt in August 2012 went over $16 trillion ---
U.S. National Debt Clock ---
Also see
The unbooked entitlements have a present value between $80 and $100 trillion. But who's counting?

Pending Collapse of the United States ---

Should we never pay down  (even partly) the U.S. National Debt or Spending Deficit? ---

Bob Jensen's threads on accounting history ---