“There can be no freedom or beauty about a home life that depends on borrowing and debt”
– Ibsen, “A Doll’s House”, Act I

Henrick Ibsen wrote this line back in 1879, but it could be written today not only for our home life, but for our country. The ?home life? many Americans have been used to of living on debt and spending more than they earn is over. Our national savings rate is now at its highest rate in 15 years. Consumers are paying off debt and firming up their personal balance sheets. Most corporations did this back in 2002 when Enron and MCI failed. We do not, in general, have a problem with corporate debt levels today. We believe we are at a tipping point where the Federal government will have to address its spending habits in the near future.

We agree with most economists that the Federal government should spend (go into debt) during an economic crisis (deep recession, depression, war, etc.). In 1941, government spending as a percent of GDP was 19% before Pearl Harbor was attacked on December 7, 1941. Spending increased over the next few years reaching a high of 52% of GDP in 1945. Once the war was over, the Federal government dramatically reduced spending. In 1947, just two years after the war ended, spending was only 23% of GDP. From 1981 through 2008, Federal spending has remained in a tight range of 35%-37% of GDP. This year, spending has shot up to 47% of GDP (highest level since 1944).

We can not borrow our way out of this crisis indefinitely. This is especially true given that most of the money we borrow comes from overseas. In 1994, only 19% of our national debt was owned by foreigners. Over the last 15 years, we have become more reliant on foreigners financing our national debt. At the end of 2008, 61% of U.S. Treasuries were owned by foreigners (Japan being the biggest at $584 billion followed closely by China at $504 billion). To illustrate our concern, we can recount a recent trip to China by Treasury Secretary Geithner. He wanted to assure the Chinese that their investment in US Treasuries was ?safe?. He mentioned this in a speech, which, according to reports, “provoked loud laughter from the audience of students.”

The great thing about economics is that it works. If abundant spending is short-term (like 1942-45) and people believe that spending will fall, there should be no problem. Just last month, we saw the yield on ten-year US Treasury Notes rise to just shy of 4% (it was just above 2% a few months ago) as China raised concerns about future government spending plans. At the same time, concerns about the level of debt have risen in the United States. We believe these two items will keep a lid on long-term spending plans because all the elected officials in Washington want to be re-elected. If Americans are concerned about the future cost of prospective plans and voice those concerns to their elected officials, it will make those officials think twice about voting for those plans.

A good example of one of these prospective plans is health care. The health care proposal seems to have lost a lot of steam after the Congressional Budget Office estimated that it would cost over $1.6 trillion over the next ten years to implement the plan and there would still be 36 million uninsured people 10 years from now. We believe the cost figures are low because they do not include the cost of rising interest rates if foreign investors stop funding our debt. With a $10 trillion dollar debt level, just a 1% (a low estimate since rates rose 2% in just a matter of months) rise in interest rates would cost the US government $100 billion in addition debt service per year! Polls show that there is less support now for health care reform then back in 1993 when Bill Clinton tried to change our health care system. Polls, debt concerns and foreign investor sentiment will, we believe, make it almost impossible for Congress to pass a massive health care bill at this time.

Congress should instead focus on making minor adjustments that will help keep the cost of health care down. Such adjustments could include uniform claim forms for physicians, allowing all insurance companies to sell insurance in every state and tort reform (to lower malpractice insurance costs). These adjustments, we believe, would have broad support and add nothing to our national debt. Once the Federal government got its spending back in order, it can then think about expanding coverage.

Parts of the system are broken, no question, but holes in the system are being filled everyday by enterprising private companies. As an example, who would have ever thought that you could fill a prescription for $4? We are also advocates of having nurse practitioners take care of patients for minor illnesses (flu, strep throat, vaccinations, to name a few). This is happening. Walgreens currently has in-store clinics (www.takecarehealth.com) where patients are treated for ailments at a lower cost than a visit to the doctor?s office or emergency room. Competition between free enterprises works – it lowers prices and increases quality.