From the May 2010 issue of Investment Advisor • Subscribe!

What It Will Cost

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As President Obama signed healthcare reform legislation on March 23, he probably would have wanted the director of the Congressional Budget Office, Douglas Elmendorf, sitting nearby. The preliminary estimates of the reform bill's costs released March 18 by the CBO helped bolster support for the bill three days before the House voted. But those estimates came with a warning about the long-term viability of those projections.

The estimates by the nonpartisan agency landed right near the targets Obama had outlined for the bill's costs. The CBO, which revised its estimates on March 20, said that over a 10-year period, ending in 2019, the new insurance provisions would reduce the deficit by $143 billion and cover 32 million people who previously lacked insurance, leaving about 23 million people, a third of whom are illegal immigrants, without insurance in the country.

A warning on these deficit-reduction numbers comes not from dubious outsiders, but Elmendorf himself. He said in his blog in March that stretching the CBO's projections through the 2020s would reduce the deficit by about one-half percent of GDP. But the hedge on that prediction, he wrote, would assume that "the provisions of the legislation are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation." Elmendorf added, "The current legislation would maintain and put into effect a number of policies that might be difficult to sustain over a long period of time."

It's just those budget-busting uncertainties about the bill that have some economic analysts sounding the alarm.

"The administration's own forecast suggests that the federal deficit by 2020 will be $18.6 trillion," said David Kelly, managing director and chief market strategist at J.P. Morgan Funds. "It is $8.3 trillion today; it has gone up by $3 trillion in the last year, and they are proposing to increase it by $10 trillion over the next 10 years. It just can't be done."

Kelly said neither the administration's 2020 forecast nor the CBO's deficit forecast of $20 trillion is viable for a properly functioning economy. "Something is going to give," he said.

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