3 reasons to feel good about the economy

It's been a summer of bad news: Bad job news, bad housing news, bad Iraq news, bad Libya news, bad news on the Euro and the debt ceiling and — OK, let me change the subject to the good news. Because it exists, too.

1) Americans are pulling out of debt. Before the recession, households were spending 14 cents out of every after-tax dollar to service their debts. Today debt service costs 11.5 cents — and is still plunging. Americans have not spent this little on debt since 1995, and at the rate things are going, it won't be long before households have de-leveraged themselves back to where they were in 1980.

Check out this chart, which maps household debt service payments as a percentage of personal income over time.

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Indeed, as Fed Chairman Ben Bernanke testified to Congress on Wednesday:

"[D]elinquency rates on credit card and auto loans are down significantly, and the number of homeowners missing a mortgage payment for the first time is decreasing. "

Americans' credit problems are turning around.

2) Exports are surging. The U.S. sold $175.6 billion of goods and services abroad in April 2011, a record. May was not quite as good a month as April, but still, altogether, the U.S. has exported 25 percent more over the past 12 months than it did in 2009. If current growth trends hold, by 2014, the U.S. should sell twice as much abroad as it did in 2009.

Increasingly, America is financing its purchases from the world with sales to the world, rather than through borrowing.

3) The debt-ceiling debate has transformed itself into a dangerous live-fire exercise. Yet even here there are signs of hope. The U.S. budget problem is most fundamentally a health-spending problem. That means Medicare and Medicaid — but especially Medicare.

Over the past two years, first in the Affordable Care Act, then in the Paul Ryan roadmap and the House Republican budget, the two parties have put forward their visions for Medicare reform.

Democrats emphasize squeezing costs from the center. They want the federal government to sponsor research into the most cost-effective treatments, then financially induce providers to follow the most cost-effective methods and eschew the least.

Republicans want to put more onus on health-care beneficiaries. They want, over time, to end Medicare's open-ended guarantee, and instead provide federal aid to senior citizens to purchase their own insurance plans — in hope that seniors will shop more carefully for plans that deliver the best results at the lowest price.

Each approach has serious potential flaws.

The flaw in the Democratic approach is the same flaw ingrained in all attempts to control marketplaces from the center: The market controllers will never know enough, and the market participants may have different priorities of their own. From the point of view of a budget analyst at Medicare HQ, it may make zero sense to pay an extra $27 to have a hospital room wallpapered rather than painted. From the point of view of the person recovering from chemotherapy, a less depressing room may be a hugely important consideration.

The flaw in the Republican approach is that the levels of premium support have been set low, threatening poorer people with the risk of having to pay much more for their post-retirement health care than they can reasonably accumulate for themselves during their working lives. If all premium support does is shift costs to people who cannot pay them, it won't survive the votes of the seniors of tomorrow.

Now here's the good part: We don't need to choose between these two approaches. We can fuse them. In fact, we almost certainly will fuse them, maybe not this year, but down the road. We can institute premium support in the Paul Ryan manner, but raise the premiums generously enough to cover the reasonably expected cost of coverage. We can require a Medicare cost-effectiveness review, but with the review being used as an information source for market participants, not as a basis for edicts from a bureaucratic center.

The tumult of political competition drives competitors to invent creative ideas. The same tumult can drive competitors to seek to destroy or discredit alternative ideas. But there are moments when the best form of competition is deal-making. Maybe this summer is not that moment. But perhaps this summer can shape the answers so they are ready when the right moment does arrive.

(Image: Federal Reserve Bank of St. Louis)