The Corner

Three Serious Cost Underestimations

I am watching a conference titled “The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go From Here?” and the impressive roster of speakers all seem to agree that things are really bad and there is an incredible risk to waiting. Deficit commission co-chair and former senator Alan Simpson was great and, as always, very funny. Chairman Ryan was great, too. When asked what he needs to move forward, he said a commitment to adopt the Ryan-Rivlin plan to reform Medicare and Medicaid.

But I was particularly interested by what Larry Lindsey had to say. He started by saying that he now works in the private sector (after basically getting fired) because a few years ago, he dared to say that a particular price tag for a particular action that the government was undertaking would be much bigger than what the government was claiming (it was the war in Iraq). As we know now, even Lindsey’s numbers were an underestimation of the actual cost.

Lindsey predicts that there are three important costs that the government is completely wrong about:

1. Interest-rate payments and underestimated: They will cost $5.4 trillion more than the current estimate over ten years.

2. Future economic growth rates are overestimated: The president’s budget predicts a growth rate of over 4 percent, which is unlikely. Every administration does it, but right now the gap between projected growth and what is likely to happen is wide.

3. The cost of the health-care law is grossly underestimated, by $1 trillion according to a McKinsey report. I haven’t read the report and can’t vouch for its accuracy (it wouldn’t be crazy to think that this law will end up costing taxpayers a lot, considering how the law expands the demand for health care); however, we know that it’s extremely unlikely that the cost savings in the health-care law will be implemented. 

In other words, it’s not good. There was also a lot of talk about what investors are doing and how they are thinking about the risk that the U.S. represents. The consensus on that seemed to be that, thankfully, investors’ attention is focused on the European crisis.

Overall, this conference is very interesting. I think there is a true willingness to find a solution. The question still remains, what solution?

Update: I mean that there is a true willingness among the people at the conference.