Debt limit debacle could hurt economy

While the federal government goes into the second straight week of shutdown, a larger crisis over the debt limit debate looms.

If you’re not a political junkie, you may be wondering why Republicans and Democrats can’t sit down and work the government shutdown out. The problem is both parties are operating with completely different narratives in mind; it’s like they’re in different orbits.

Defunding Obamacare is a nonstarter and most Republicans know this. The real test for Obamacare comes a couple years out: Do the published health exchange rates hold, or do we go into a death spiral with higher premiums because of what’s called adverse selection?

Adverse selection means, in this case, a situation where only the really sick buy insurance — and the healthy don’t buy into the system. If that were to happen, the actuarial math would not support the premium structure and it will fall apart.

The amount of money we pay for health care, both public and private money, is extraordinary. We spend double the next closest country (France) on health care. Yet our life expectancy is the shortest of any other developed country. And our infant mortality rate is much higher too, according to what I saw in The Financial Times of London.

Still, the sound and fury about Obamacare ignores the most important issue facing us right now: The long-term debt obligations of the United States that are unsustainable.

I told you recently about the problems that come from having a rapidly aging population with fewer workers to support the social promises we’ve made.

Over the next few decades, we’re going from an active to retired worker ratio of 5:1 to 2.5:1. Those 2.5 workers cannot possibly create enough economic output to cover the promises of health care and for Social Security, which is a smaller problem in comparison.

Meanwhile, it would be just plain dumb to default on our nation’s debt, no matter your political persuasion. That’s because we are the world’s reserve currency. People put money in the U.S. dollar when things are rough overseas. Failing to make payments on our treasury notes, for example, would tear at the future of our country. And dare I say, it would lower our living standards.

That’s because today we get a subsidy from the rest of the world. Our interest rates are lower than they would otherwise be because foreigners want our debt so badly as a safe zone. If they know we’re not going to be paying our debt, they won’t keep putting money in the U.S. dollar, and our interest rates will rise. Then we will all suffer.

Of course, it’s no surprise the 535 members of the House and Senate don’t understand this. They are not economists or financiers. So how could they know?

So I say keep the government shutdown as a political theater move if you want. But the debt limit is not the place to do Custer’s Last Stand. That’s playing with fire.

The reality is we have to attack the promises we’ve made and how we will pay for them. We have to break the social contract and change how we provide for an aging population when we have far fewer workers in the future. Just know that all of what I’m saying has no effect if you receive Medicare or Medicaid today; nothing changes for you. What I’m talking about is a bigger problem that has to be addressed going forward.

For further reading:

• How will a government shutdown impact you?