Philadelphia Reflections

What Is Our Final Goal?

The reader will have encountered much talk about interest rates in this book, but there are really two interest rates, public sector, and the private sector. Our economy is balanced on the steadiness of definitions. The definition of medical care has been steadily eroded by including new features, to the point where there is even an effort to re-name it "health care". Obviously, it is impossible to plan for paying the cost of something whose definition changes. Similarly, changing the definition of the private sector and public sector befuddles the discussion at one peculiar point. It is commonly said deflation is a spiral condition which is almost impossible to rescue. Why should that be? Are these unrelated issues, or is there a common theme?

Lord Maynard Keynes invented the discipline of macroeconomics, and eventually invented the idea of curing private-sector recessions by transferring funds from the public sector to the private one. Sometimes that works, and sometimes it doesn't. Even Keynes admitted there was a limit to what public-private transfers could do, a condition called deflation. Since public sector debt is entirely in fixed income securities of up to thirty years duration, it is difficult to reduce public debt. Therefore, when private-sector prices fall in a recession, they must not fall below the point where even more money shifts out of the private sector into the public sector, where higher interest rates are to be found, and a deflationary spiral begins.

Two more things. As interest rates go up, the value of bonds go down; that's simple enough but easy to forget. And the approaching danger of deflation is found in the ratio of GDP (Gross domestic product) to the national debt. By definition, a recession is threatened when GDP goes down or at least fails to go up. It must be qualified, however, by the size of the public sector to be used to rescue it, inversely represented by the size of the national debt. A few lucky countries have a small ratio of debt to GDP, perhaps 20%, while the dangerously unstable nations of southern Europe are running over 200%. The US ratio is now about 100%, roughly stating the public and private sectors to be about equal in size. But the point I am trying to make is that transferring large amounts of the health care industry to the public sector is invisibly reducing the borrowing power of the public sector, hence it is reducing the future power of the Federal Government to moderate a recession. At some unspecified point between 20% and 250%, nobody will lend more money to your public sector. Or if they will lend, they will demand a higher interest rate, which will reduce the value of existing government bonds. You have started a spiral, from which even Lord Keynes cannot rescue you.

The reader will thus perceive that privatization of health care, whether Medicare, Medicaid, or subsidized private programs, diminish the ratio of national debt to GDP and reduces the danger of deflation. Paradoxically, it thereby probably increases the ability of the Federal government to borrow for other purposes.

Originally published: Sunday, November 23, 2014; most-recently modified: Sunday, July 21, 2019