Bond Rates and Obamacare

Posted by Michael Barone - National Review

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The coming crunch will make last Sunday look pretty.

Not many people noticed amid the Democrats’ struggle to jam their health-care bill through the House, but in recent weeks U.S. Treasury bonds have lost their status as the world’s safest investment.

The numbers are pretty clear. In February, Bloomberg News reports, Berkshire Hathaway sold two-year bonds with an interest rate lower than that on two-year Treasuries. A company run by a 79-year-old investor is a better credit risk, the markets are telling us, than the U.S. government.

Warren Buffett’s firm isn’t the only one. Procter & Gamble, Johnson & Johnson, and Lowe’s have been borrowing money at cheaper rates than Uncle Sam.

Democrats wary of voting for the health-care bill may have been soothed by the Congressional Budget Office’s report that it would reduce federal deficits over the next ten years. But bond buyers know that the Democrats gamed the CBO system to get a good score.

The realities, as former CBO director Douglas Holtz-Eakin pointed out in the New York Times, are different. The real cost is disguised by the fact that the bill includes ten years of revenue but only six years of spending. It includes $70 billion in premiums for long-term care that will have to be paid out later. It excludes $114 billion in discretionary spending needed to run the program. It includes nearly half a trillion dollars in unrealistic Medicare savings.

Holtz-Eakin’s bottom line: The bill will not lower deficits, but will raise them by $562 billion over ten years. Treasury will have to borrow that money — and probably pay much higher interest than it’s paying now.  Moreover, once the bill is fully in effect, the Cato Institute’s Alan Reynolds points out, its expenses are likely to grow at least 7 percent a year — significantly faster than revenues. At that rate, spending doubles every ten years.

No wonder Moody’s declared last week that the Treasury is “substantially” closer to losing its AAA bond rating. It’s not only the federal government that is heading toward insolvency. State governments will have to spend more under the health-care bill — $735 million in Tennessee alone, according to Democratic governor Phil Bredesen.

And state governments are already facing a huge problem called pensions. The Pew Charitable Trusts estimates that state-government pensions are underfunded by $450 billion. My American Enterprise Institute colleague Andrew Biggs argues in the Wall Street Journal that the real figure is over $3 trillion.

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