US presidential election Central bankers in Jackson Hole for their annual retreat this weekend may find themselves watching the debate over healthcare reform on US television. Perhaps they should ponder the power of endowment effects – how cost and uncertainty deter change. For the main problem for the global economy is the fragility of the status quo.
The US government already has a difficult trick to pull off. It must finance spending this year that will be almost double tax receipts, while reassuring buyers of Treasuries that printing dollars is only a temporary measure. But as consumers save more of their income, consumption will be structurally lower, potentially requiring years of heavy stimulus spending to fill the gap. If so, retaining the confidence of debt buyers worried about unsustainable borrowing will require cutting entitlements to Social Security and healthcare for America’s ageing population. Not something that the fight to reform healthcare suggests will be easy.
