How the government borrows from the bond market, simplified version: A Treasury guy walks into a room full of people with money. He says, OK, were selling 10-year notes today. Any takers?
A man in the front row says hell do it if he can get 2.2 percent in interest. Everyone laughs. A woman says, What a dreamer. Then she says shed do it for 2.15 percent. Somebody else breaks in and offers 2.10, and so on until the rate gets down, say, to 2.068 percent, which was the 10-year yield at the close last Wednesday.
Thats a bowdlerized version of a process that happens almost instantaneously, but the thing to know is the rates are subject to the whims of a market that can turn on a dime and force rates up. The U.S. government now can borrow at unbelievably low rates, despite its massive deficits, because bonds offered by other countries are seen as even riskier bets.
Which takes us to the failure of the supercommittee. This was probably the last serious attempt to do anything useful about spending until next years election. In other words, Washington has laid down a bet that the market will continue to gobble up Treasuries at low rates for an entire year.
Talk about a high-risk play. If we lose the gamble, our slow-motion fiscal train wreck will start feeding on itself as interest rates rise. Mix high yields into the pile of debt we already have and the governments credit card payments will truly balloon.
The supercommittees work wasnt all for naught. The GOPs Medicare reform concept acquired additional respectability. As The New York Times reported, some Democrats concluded the idea of giving seniors a fixed sum of money and letting them buy private coverage with the costs and terms regulated by Washington might work.
This was progress, and it makes you wonder why President Obama doesnt grab this opportunity, along with some of the others just lying around, and lead the way toward some sort of solution.
The Simpson-Bowles deficit reduction commission showed the way to tax reform: lower rates, a broader base and within that regime, yes, more revenue. Another opportunity is corporate tax reform. Theres broad agreement that the current rate of 35 percent is so high its uncompetitive compared with other countries.
But the big challenge is Medicare. Everyone from Obama on down knows it has to be fixed or it will eat the rest of the budget and collapse. When it started in the 1960s, the experts figured it would cost about $12 billion by 1990. When 1990 arrived, the bill was $100 billion. The program is out of control.
Democrats resist reform for baldly political reasons. Earlier this year, The Washington Post reported that Sen. Patty Murray of Washington, who was also a supercommittee co-chair, was working quietly to thwart any compromise on Medicare. We should be very careful about giving away the biggest advantage weve had as Democrats in some time, she said.
So the Dems will do what theyve done for decades portray the Republicans as despoilers of benefits for seniors. They will do this because it has worked in the past.
The entire developed world is reeling under the costs of a now-unaffordable social model in which health care costs loom large. Yet the Democratic Party despite a few nibbles at reform insists that we do nothing.
The Republicans are going to be hammered on Medicare next year. Politically it could work. But economically its madness, and the economic dimension is how it will be judged by the people in the room with money.