Philadelphia Reflections

The musings of a physician who has served the community for over six decades

Related Topics

Philadelphia Medicine
The first hospital, the first medical school, the first medical society, and abundant Civil War casualties, all combined to establish the most important medical center in the country. It's still the second largest industry in the city.

Medical Economics
Some Philadelphia physicians are contributors to current national debates on the financing of medical care.

Insurance in Philadelphia
Early Philadelphia took a lead in insurance innovation. Some ideas, like life insurance, flourished. Others have faded.

Clinton Plan Summary: Nation's Financial Health


We now address two national financial issues which dwarf some others of fairly major consequence. During the past two decades, we have seen dramatic changes, even revolutions, in the management of financial transactions. Banking with paper checks is on the way out, mortgages held by banks are obsolete, coupon bonds are a quaint relic, retail stock brokerages are vanishing, financial instruments like derivatives and private equity are consuming us before most people can even define them, the central banking management of the money supply is a miracle, and so on and so on. No one claims those things are unimportant. They just aren't as important as the way we blundered into financing health care; any action we took is less important than the way we neglected it. Or refused to face it.

When the state of New Jersey made a promise to pay the healthcare costs of state employees after they retire, the Legislature created a liability. Although provisions were made to pay for the costs of this promise for a few years, the liability was essentially unfunded. That is, it was quite predictable that in a few years there would be no way to pay for it. At present, the unfunded liability is calculated to be $58 billion dollars, and the state taxes in New Jersey are already the highest rates in the country, hurting the influx of business and promoting the emigration of those who find a cheaper place to live. Remembering there are fifty states in only slightly better shape, the total national debt for this purpose alone is surely more than a trillion dollars. Secondly, the auto industry is said to have $100 billion in unfunded liabilities for the healthcare benefits of their retirees. We have lots of other industries of course, so it's not wild to assume that another couple trillion exist in industrial healthcare financing. Give or take a trillion, it's a lot of money without mentioning Medicare, the biggest unfunded liability of all. While this burden of debt was bound to create a problem eventually, it now comes at us with a fairly predictable shortfall when the baby boomer quits contributing as workers and starts demanding payment as retirees, because the boomers neglected to have enough children to support them.

The auto industry has the same problem with demographics but has the additional problem that the Japanese made better cars. Starting later, the Japanese companies won't have as many retirees for a decade or so. Our politicians are thus beginning to see they may have to choose between watching our biggest industry go bankrupt, or bailing out the auto companies with tax money. With the Medicare deficit just on the horizon, it will be fairly uncomfortable to add to it in the next couple of years. The discomfort for politicians will be deepened by publicity about the terms of the agreement made decades ago between the auto companies and their union, the United Auto Workers. The heart of it can be briefly stated to be that the companies agree to pay absolutely all the healthcare costs of the workers, even those who quit in six months, for the rest of their lives. If Medicare pays the costs of the workers that will be fine, but if not, the companies are on the hook. The substance of this arrangement is to raise the company costs every time Medicare introduces a cost-saving measure.

The third ingredient of this perfect storm on the horizon is the consequence of whatever the government decides to do about it. We can raise taxes, but the government's chronic inability to save money makes it unlikely that we can pay much of this debt off in advance. To use fancier language, we are already at the point on the Laffer Curve where raising taxes produces progressively less revenue; carried to extremes, taxation will provoke a depression. On the other hand, inflation isn't very attractive, either.

For centuries, governments have found it easier to borrow money than to raise taxes. The currency gets progressively less valuable until it eventually can become totally worthless. That's what happened to Austria and Germany after the reparations of the Versailles Treaty were imposed as external taxes in the 1920s. The suffering caused by this episode of hyperinflation was one of the main grievances leading to the ascendency of Adolf Hitler, although it is true the German economy was in poor condition after losing World War I.

In any event, whether our efforts to correct the situation lead to depression or inflation, or both, the sequence of the collapse of the auto industry, followed by the desperate constraint of healthcare costs, and then the monetary convulsions amply justifies the term of Perfect Storm. The sooner the matter is addressed the less painful it will be. There were a hundred opportunities to address this problem, starting in 1943. But the last time the country stood at attention, waiting for the revelation of what would reform our broken system was in 1993. And when the miracle of deep academic thinking finally emerged with fanfare, Congress wouldn't even bring it to a vote, and rightly so.

Originally published: Thursday, August 02, 2007; most-recently modified: Sunday, July 21, 2019