Wednesday, July 11, 2012

Why Obamacare (and any major entitlement) will bankrupt the US?

I had quite a few discussions with Facebook friends and their friends after the Supreme Court ruling on Obamacare's constitutionality came out 2 weeks ago. The challenge with these Facebook discussions is that everyone just repeats his pet arguments without addressing what others said, which I often couldn't help doing myself. As such, I will lay out my arguments here, which targets not the ethics but the fiscal feasibility not only for Obamacare but also for any major entitlement like free college education and free public transportation, and hope to drive some discussions. Unlike civil rights like same-sex marriage, healthcare is an economic good and economic analysis is essential. These arguments are politically explosive and will probably not be brought up in the US mainstream media or blogosphere but I have the luxury of not being a US citizen or permanent resident and not living in the US now.

Please skip this article if:
- You are for everything Obama proposes and everything Republicans oppose. I am wasting my time to convince you. However, King Obama will be happy to take your donations which he will spend on Romney-bashing ads during Ohio State football games that you will probably never see. High Priestess Pelosi doesn't need your money but your prayers will give her power.
- You think healthcare is a right. I am well aware that Americans are endowed with certain unalienable rights. However, after more than 200 hundred years of lawmaking and court rulings, if the Framers, Congress and Supreme Court haven't said explicitly something is a right, it isn't one no matter how much you think it is. 
- You think Obamacare actually saves money. Obamacare saves money according to CBO primarily because of cost savings from improving efficiency of the healthcare system, which are extraneous to Obamacare as the government should always improve efficiency with or without Obamacare, and the CLASS act, which will bring revenue in its first years of implementation as a new entitlement for elderly care, but was deemed actuarially unfeasible by Sibelius and pulled from Obamacare earlier this year. Without them, Obamacare only saves very little on paper and judging from Social Security and Medicare, huge cost overruns are inevitable for major entitlements.
- You think the US doesn't have a chronic deficit problem. Even Obama said it does. 

Read further if you believe that Obamacare will be costly but there should be universal healthcare for the citizens of an advanced nation. I agree with that statement except that given two unofficial, unique and difficult-to-replace entitlements, the US is the only advanced nation where universal healthcare, or any major entitlement, is a fiscal non starter. 

The first entitlement that is unique to the US is global defense. Since its entry to the WWII following the Pearl Harbor attacks, the US has participated in major global military campaigns voluntarily (Many UN campaigns and the Second Gulf War), involuntarily (WWII and the Korean War) and somewhere in between (Vietnam War and the Afghanistan War) and will likely continue doing so. As such, the US has to maintain peacetime global military presence by paying for military bases abroad and aircraft carrier groups in the oceans given the legacies of some of these wars, given it's the one of the three NATO countries with meaningful military forces (UK and France are the other two) and given it's unspoken role as the primary sponsor of UN security forces. The military presence and expenditures have decreased following the end of the cold war but increased during the First Gulf War and again after the Second Gulf War. The jury is very much still out on whether the US' world police role makes the world more peaceful overall. However, few would dispute that the US' military might has kept military conflicts regional and prevented another major world war. Moreover, few Americans would envision that the US will one day go imperialist and go on conquering mode. I would also argue that two positive externalities of US' significant military presence and expenditures are 1) free and safe passage in the oceans which facilitate global trade and 2) commercialization of technologies developed by the US military like GPS and the Internet which facilitate communication and productivity increase.

Note that the US doesn't charge other countries for providing security services and in many cases, provides foreign aid or distributes technology free of charge. Unless the world becomes much more peaceful or until the US runs into significant financial difficulties, the US will likely maintain significant global military presence. Let's hope it is the former not the latter. 

The second unique entitlement is open immigration. Very few will dispute that the US is an immigrant nation given how the country was founded. For this analysis, it is essential to divide immigrants to economic immigrants and non-economic immigrants. Until WWII, all immigrants were essentially economic immigrants who brought labor, capital and most importantly, entrepreneurship to explore opportunities in a new country with lots of land and resources. There was essentially no welfare system and although there was no direct taxation until the ratification of the 17th amendment in 1913, everyone was essentially a net taxpayer via indirect taxation. Also, there was no such concept as illegal immigration. With the introduction of major entitlements through New Deal (Social Security) and Great Society (Medicare and Medicaid), Congress saw the need of limiting immigration and passed laws accordingly. However, for humanitarian and diplomatic reasons, the US started taking non-economic immigrants, primarily overseas family members of US citizens and refugees. The number of non-economic immigrants increased over time because of population growth which increased the number of eligible candidates. Moreover, politicians realized that these non-economic immigrants tend to be net welfare recipients and voted along with their family members that were already US citizens which encouraged them to expand non-economic immigration at the expense of economic immigration which involves foreign graduates in American universities and experts in science and technology that are almost always net taxpayers. There is also a new type of economic immigration not sanctioned by the government - illegal immigration primarily from south of the border. Since they don't pay taxes, illegal immigrants are at best neutral to US public expenditures. Unless the US expands legal economic immigration or significantly cuts down non-economic immigration, the net increase of non-economic immigration will eventually bankrupt the US government given the other issues inherent with the current entitlements and expected from Obamacare. 

This is a problem unique to the US. The only other major Western countries that have open and semi-open immigration policies are Canada, Australia, UK and France. With sparse populations and abundant natural resources, Canada and Australia resemble the US a century ago and arguably many of their mining, fishing and drilling regions will never get enough settlers because of the harsh working conditions, while the UK and France limit immigration to citizens of some of its ex-colonies.

Without their explicit agreement and probably knowledge, Americans have to take on two huge entitlements whose beneficiaries are not necessarily themselves. The decisions were made on behalf of them by almost every commander-in-chief they have elected since FDR for defense and by God and the Founding Fathers for immigration, and no President and Congress they elect in future can easily overturn those decisions. On the other hand, no Founding Father, even the most hawkish Hamilton, could imagine that the country would be saturated after significant territory expansions and become the world police. Even if they had, they couldn't come up with a better system without compromising the separation of powers, democracy and sovereignty - it's unfathomable to give foreign leaders and citizens a say on who the US President should be. 

We cannot blame Americans, half of which don't have passports, for voting for their President and Congress based on domestic issues and not considering the two entitlements that they have no control over. My goal here is to make more Americans aware of the reality and vote for politicians that will address these two entitlements before taking on any new entitlements. Even if they insist in bankrupting their own country by voting for politicians that will do otherwise, the rest of the world should forever be grateful to Americans for sacrificing their own welfare to make the world a better place for everybody.

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