Geithner

The European Union has lower government debt levels than America. Gross government debt in the 27 nations of the EU was 80% of the region’s GDP at the end of 2010; in America gross federal debtat the end of 2010 was 94% of GDP. Furthermore, government debt is growing more slowly as a percentage of GDP in the EU than in America, because pretty much every nation in the EU is implementing austerity measures. The general government deficit in the EU-27 in 2010 was 6.6% of GDP. In America the federal deficit in 2010 was 9% of GDP.

Mr Ryan clearly thinks Europe is an economic basket case. Obviously, there is a grave economic crisis underway in the euro zone, and many European countries’ economies contracted in the fourth quarter of 2011 while America’s grew solidly. But it makes no sense to attribute the EU’s poor relative economic performance to higher debt levels or higher deficits, because the EU has lower debt levels and lower deficits.The euro-zone crisis is in fact largely due to persistent current-account imbalances between member economies caused by differences in competitiveness, and the unwillingness of the more competitive countries to subsidise the less competitive countries, as would happen between states in America. But regardless of what you think the cause of the euro-zone crisis is, it doesn’t make sense to attribute it to phenomena that don’t exist, or to warn that America is in danger of becoming Europe if it keeps running such high deficits when in fact the way for America to become Europe would be to immediately and drastically cut its deficits.

Moreover, as my colleague explains, the reason the Obama administration’s budget shows projected debt levels curving inexorably upwards after 2023 is pretty much entirely because of health-care expenses on Medicare and Medicaid. Medicare and Medicaid expenses will start to blow out the US government’s budget from 2023 due to the impact of baby-boom retirees and the explosive growth in medical costs in America. Will this make America more like Europe? No. European countries do not spend more on government-provided health care than America does. They spend less. In 2009, according to OECD data, the US government spent $3,800 per citizen on health care. The German government spent $3,242. The French government spent $3,100. The British government spent $2,935. America is richer and should be able to afford more, but even as a percentage of GDP, US government spending on health care is comparable: 8.3% in America to 8.9% in Germany, 9.2% in France and 8.2% in Britain. And what of those wastrel Italians? They spent…7.2% of GDP. (In America, unlike Europe, government spending amounts to less than half of total spending on health care; when you add in private spending, America spent 17.2% of GDP on health care in 2009, while rich European countries were in the 11-12% range. And unlike rich European countries, we don’t cover anywhere near all of our citizens. But that’s a different subject.)

Not only that, US government health-care spending is rising faster than European government health-care spending. It’s rising faster even measured as a percentage of GDP. From 2001-2009, US government health-care spending went from 6.3% to 8.3%. In Germany it went from 8.3% to 8.9%, in France 8.1% to 9.2%, in Italy 6.1% to 7.2%. Only in Britain, where New Labour launched a deliberate campaign to grow the National Health Service to levels more comparable to other wealthy economies, did spending rise faster than in America, from 5.8% to 8.2%. Again, because America’s long-term debt problems are driven by government health-care spending, we would be in better shape if we looked more like Europe, not less.

I don’t expect Paul Ryan to conclude from all this that the reason why Europe is in a recession is that they’re not doing enough deficit spending and loose monetary policy to stimulate their economy, and that it’s a good thing America has run massive deficits for the past three years or we might not be seeing the cautious recovery we’re seeing. It would be nice if he did conclude this, because it’s true, but I don’t expect him to. But I do think he ought to stop waving at a fantastic vision of a Europe that doesn’t exist when he needs a bogeyman for whatever point he’s trying to score in an argument.

Yesterday James Pethokoukis of the American Enterprise Institute highlighted an interesting chart which, it might surprise you to know, came from the president’s budget.

The chart is too obvious to be terrifying. That change in the slope of the debt-to-GDP curve starting in 2022 is caused by America’s increasing number of retirees and the rising cost of health care. There’s nothing original in noting that Medicare, Medicaid and Social Security are the main drivers of America’s long-term debt problem. But there it is in stark relief. And on Thursday it ledto this entertaining exchange between Tim Geithner and Paul Ryan.

Mr Geithner’s comments suggest that the administration is taking a two-track approach to America’s debt problem. The first track involves whittling down America’s short-term deficit to reasonable levels. So the budget released on Monday reduces the deficit to 2.8% of GDP by 2019, and maintains that level for the rest of the ten-year window. As my colleague notes, “That’s close to primary balanceathe government’s books would nearly balance net of interest costs.” Not bad, but it’s on the second track that the administration really disappoints. That track involves dealing with America’s out-of-control spending on entitlements, and this year’s budget largely avoids the problem. Hence, you get Tim Geithner telling Paul Ryan that the administration doesn’t have a definitive solution, “we just don’t like yours”. And it didn’t like the one put forward by its own deficit commission. Which leaves Mr Pethokoukis to conclude that “Obama has no interest in being Clinton 2.0, the Debt Cutting President. He wants to be FDR 2.0, the Expanding Welfare State President.”

Actually, it seems he wants to be both.Mr Pethokoukis forgets that Mr Obama pursued a grand bargain with John Boehner that would’ve raised taxes and cut the safety net. And he forgets that Mr Obama’s largest new programme, health-care reform,was fully paid for (and then some). Moreover, in the early days of Obamacare there was a real effort to include significant cost-cutting measures in the final bill. The Republicans, in turn, demagogued the issue, alluding to death panels and forsaken seniors. Still today the president is paying a price, as Mitt Romney nonsensically criticises him for ignoring America’s “entitlement crisis” while “cutting Medicare benefits for seniors”.But I imagine if Mr Obama does win re-election, making the electoral ramifications of his actions a second thought, and the economy stays healthy,he’ll push to curb entitlement spending, and put Republicans on the spot. I could be wrong, but there seems to be just as much evidence pointing to Mr Obama as being Clinton 2.0 as FDR 2.0. And I think Mr Obama’s team realises that if another Democratic president embraces the mantle of fiscal responsibility, the party will have earned ownership of the issue for some time to come.