LTC Bullet:  Shutdown Irony

Friday, October 11, 2013


LTC Comment:  Default gestalt hides reckless debt bet.


LTC Comment:  How ironic that most government shutdown news and analysis despairs about the consequences of default now, but ignores the debt itself, its causes and the hugely greater risk of a nearly inevitable, much bigger default later.  Most media coverage focuses on the symptoms, not the disease.

Writing this yesterday with the stock market soaring over hopes of a temporary debt ceiling compromise, I knew it might be old news by publication time today.  But this morning, as I apply the finishing touches, little has changed although “talks” with the White House have begun.

While I mused about writing a Bullet on this subject, I read an op-ed in yesterday’s Wall Street Journal that did the job admirably for me:  “David Malpass:  The Bigger Battle Behind the Shutdown” (gated).  Following are a few summary excerpts from what Malpass had to say followed by my thoughts on the situation’s relevance to long-term care policy.


From “David Malpass:  The Bigger Battle Behind the Shutdown,” Wall Street Journal, October 10, 2013

"At its core, the shutdown is part of a much bigger battle to restrain the federal government. It is spending $3.6 trillion per year without a budget, and its expenditures are expected to increase rapidly in the years ahead.

"Meanwhile, the government has piled up $17 trillion in debt and $60 trillion more in unfunded spending promises. The Federal Reserve will borrow $1.1 trillion in 2013 alone to buy bonds-and it reserves the right to borrow unlimited amounts for future bond purchases without congressional or presidential permission." . . .

"Much federal spending can't be justified. The government shutdown is giving more insight into the problem-a staggering $250 billion per month, 80% of spending, runs on autopilot without any congressional involvement or control. So much for the Constitution's bedrock principle that 'No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.'" . . .

"Rather than discuss restraint, the administration has increasingly turned to the Federal Reserve as a crutch. The Fed is borrowing and spending $85 billion per month on bonds, and it claims the legal authority to increase its debt at will. Wall Street is intensely focused on supporting this profligacy and profiting from it." . . .

"The Fed is choosing to buy long-term bonds with short-term debt. The result is a rapid shortening in the effective maturity of the national debt that benefits current politicians but puts taxpayers at risk. Like an adjustable-rate mortgage, the borrower, in this case the government, gets a lower interest rate now but will have to refinance at higher rates later." . . .

"The upside is clear: Growth, jobs, the dollar and financial markets would surge if the shutdown leads to restraint."


LTC Comment:  That’s the big picture.  Now here’s our focus on long-term care.

What Malpass calls “a staggering $250 billion per month, 80% of spending, [that] runs on autopilot” includes government spending on long-term care.  Since 1965, Medicaid and Medicare have paid for most expensive LTC with three major consequences.  First, by paying mostly for nursing home care, government created “institutional bias” and crowded out a private market for home and community-based care.  Second, by making most expensive long-term care virtually free, government discouraged responsible private LTC planning and impeded markets for private insurance and home equity conversion products to fund LTC.  Third, by forcing interest rates to near zero, government (i.e., the Fed) administered the coup de grace to market-based LTC financing and delayed indefinitely the reckoning for government’s profligacy.

Now we all find ourselves on the edge of a fiscal cliff.  By hiding from financial reality for so long, public policy has brought us to the cusp of a Hobson’s choice about long-term care.  Back off voluntarily from paying for most long-term care with non-existent (i.e., borrowed or printed) government funds now or be forced to do the same by deteriorating economic and monetary conditions a little later.  Take it or leave it.  The end game is the same and it’s getting nearer day by day. 

To illustrate just how grave this situation is, the Center for Long-Term Care Reform developed an “Index of Long-Term Care Vulnerability.”  We provided an outline of the Index in an LTC Bullet last August.  In the meantime, we’ve refined the index and applied it to the United States and to three states:  Virginia, New Jersey and Georgia.  The results are not encouraging.  The country as a whole and all states face staggering challenges to the sustainability of their long-term care financing systems.  We’ve summarized the demographic, economic and social challenges in these seven questions:

  1. How many older people are coming in the next few decades?
  2. How sick will they be?
  3. How viable is Medicaid as a long-term care payer?
  4. How reliable is federal revenue on which Medicaid mostly depends?
  5. How reliable is state revenue on which Medicaid secondarily depends?
  6. How much private-pay revenue is available to relieve LTC financing pressure on Medicaid?
  7. How strong is dependency on public programs (i.e., the entitlement mentality)?

Stay tuned to LTC Bullets for answers.  It may already be too late for solutions short of public funding default and market-based reconstruction.