America has a spending problem. It also has a healthcare problem. These are not two separate crises but rather the same crisis wearing different clothes. The Cato Institute's new "Handbook on Affordability" is a great resource to understand the root problem and how to fix it.
Start with a recap of the fiscal picture. The federal government runs large deficits so persistently that they've become a structural threat to price stability. As Romina Boccia and Dominik Lett argue in the handbook's second chapter, when debt expands faster than the economy, investors begin pricing in one of three outcomes: higher future taxes, deeper spending cuts or inflation that quietly erases the real value of what the government owes. When Congress fails to credibly commit to the first two, it chooses door No. 3 by default.
The inflation surge of 2021 was the consequence of an extraordinary flood of deficit-financed spending with no commitment to repaying it. As our money lost purchasing power, the Federal Reserve eventually had to raise interest rates sharply, further reducing purchasing power. Politicians have yet to meaningfully tighten the government's belt, and we continue to have unnecessarily high interest rates and prices.
What's more, restoring a government's credibility once it's lost becomes increasingly difficult and costly. Congress appears unwilling to pay this price. As such, expect a repeat experience in the future.
But the problem is deeper, because deficits are not evenly distributed across the budget. This one, as you probably know, is overwhelmingly driven by two programs: Social Security and Medicare. Social Security alone carries roughly $28 trillion in unfunded obligations. Medicare is projected to grow faster than the economy indefinitely, with no natural ceiling. These are not programs that trim themselves. So, without hands-on, structural reform, the debt path is mathematically unsustainable, and the continuation of the inflation risk described by Boccia and Lett is all but certain.
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Which brings us to the healthcare half of this story, and to an inconvenient truth that virtually every major political proposal is designed to avoid.
The United States spends nearly 18.5 percent of its national income on healthcare, more than any nation on earth and double the average of other wealthy OECD democracies. The standard political response to the problem is to propose more government subsidies to help patients cover costs. This response only makes sense on a surface level and has the causation backward.
As Michael Cannon and Jeffrey Singer demonstrate in their contribution to the Handbook, subsidies are the furthest thing from a solution to healthcare unaffordability. They are its primary cause.
The mechanism is not complicated: When a system dominated by Medicare, Medicaid and other compelled government and quasi-private spending insulates patients from feeling the cost of care, the feedback loop that disciplines prices in every other market stops working. Patients who don't need to pay out of pocket for a marginal service don't ask whether it's worth it. Providers have no reason to reduce costs for price-insensitive customers.
Instead, we passively pay even more through taxes and expensive insurance premiums. And we get care that is neither notably superior in its outcomes nor remotely affordable without those very subsidies.
Supply-side liberalization would help a great deal. Cannon and Singer identify federal health-insurance regulations that cause many customers' premiums to double. Evidence from deregulated market segments shows that removing these regulations would cut the same premiums substantially.
Further, the FDA's monopoly over drug approval keeps medicines already available in Europe, Canada, Australia and elsewhere off the American market. Recognizing more foreign certifications would introduce genuine competition into the certification process itself, with welcome effects on prices and access.
There's more. Prescription requirements for medicines that adults can safely self-administer add costs and delays without improving safety. State-level certificate-of-need laws amount to government-enforced cartel protection for incumbent hospitals and facilities. Occupational-licensing restrictions prevent nurse practitioners, pharmacists and other trained clinicians from practicing at the level of their competence, propping up the prices of the most expensive practitioners.
Reforming this cronyism requires no new spending or bureaucracy. It requires only that Congress and state legislatures remove the regulatory architecture that has turned American healthcare into the world's most expensive and least price-competitive market.
These supply-side policies are an important part of the fiscal and inflation story too. Medicare and Medicaid pay for care made more expensive by decades of accumulated regulation. You cannot sustainably reduce the programs' costs without reducing the underlying costs of what they buy. You cannot curb the debt curve without reducing the healthcare spending trajectory. And you absolutely cannot fix affordability when you are heading toward a debt crisis.
Veronique de Rugy is the George Gibbs Chair in Political Economy and a senior research fellow at the Mercatus Center at George Mason University.
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