Tuesday, October 29, 2013

Life-Cycle Spending and Government Expenditure

Economic theory shows that people tend to follow a general spending cycle over their lifetimes: they incur debt when they are young, they pay off the debt and save when they are middle-aged, and they dissave when they are old. This is logical behavior and only the ignorant bemoan it.

We hear a lot about how much healthcare spending is late in life, and about how preventive care would have been cheaper long-term. Cheaper for whom? By not electing for preventive care, the individual is indicating that, given his income constraints, he doesn't consider it cheaper. Would I rather have $80,000 in medical bills in 40 years or spend an extra $100 per month now. Without even getting into present value calculations, if I don't have an extra $100 per month now, I'm not going to pick that option.

When this spending is socialized, though, time horizons go away. Because the government is infinitely lived, it just runs present value calculations and passes a law drastically increasing my current spending without consideration of my income constraints. (Right now any government accountant reading this is thinking, "I know what the word 'income' means, and I know what the word 'constraints' means, but when they're used together like that I have no idea what he's trying to say.")

So the government is saving on hypothetical spending in 2053 by bankrupting me today. For the second time in three years, my health insurance plan has become illegal and I will not be able to keep it. In 2010 my premiums cost me $177.72 per quarter. Now I pay $353.31 per quarter, and that plan will now have to be replaced with something more expensive yet. The "Affordable Care Act" is doing just what it was intended to do: driving private individuals onto government insurance.

No comments: