Health Care Reform is Vital for Growth

Everyone at Kauffman is obsessed with the idea of economic growth, and I have become increasingly distressed that without the passage of bipartisan health care reform during this legislative session, the prospects of economic growth in the U.S. will be endangered. I said on June 23 that the current course was a dead end, and I'd like to pat myself on the back here ("The vast machinery of politics and media will trudge on for months, but essentially this is over."), but I am not cheering the current scene. If the administration doesn't move towards an obvious centrist resolution (Wyden-Bennett), the stalemate will endanger the U.S. economy.

The explosion of health care costs in their current form is the danger. If these costs were eating up a larger percentage of income, that alone would be no concern. A wealthy people will shift consumption preferences, and why not shift them towards longevity in an economy that provides basic necessities at ever lower costs? Consider this observation by Martin Feldstein:

Those who worry about too much health care cite the Congressional Budget Office's prediction that health-care spending could rise to 30% of GDP in 2035 from 16% now. But during that 25-year period, GDP will rise to about $24 trillion from $14 trillion, implying that the GDP not spent on health will rise to $17 billion in 2035 from $12 billion now. 

No, the danger is that health costs are invisibly soaking up income because most health insurance is paid in the form of employee benefits, a consequence of distortionary tax rules. (Remember the growthology mantra from 2 months ago: Taxing employer-provided health insurance is not just a way to pay for reform, it is health care reform). Feldstein again: "Like virtually every economist I know, I believe the right approach to limiting health spending is by reforming the tax rules."

Because health insurance costs that would otherwise go into take-home pay, their rise enables the existence of the pernicious Dystopian Myth that middle class incomes are stagnant. The Dystopian Myth is social poison, a fiction shouted by the negative nabobs that convinces voters the American economic system is failing them. And that is dangerous. As a social force, this empowers dystopian politicians and threatens free-market capitalism.

Oddly enough, President Obama made both of these points in his July presser:

• "...even before this crisis hit, we had an economy that was creating a good deal of wealth for folks at the very top, but not a lot of good-paying jobs for the rest of America."

• "It’s about every small business that has been forced to lay off employees or cut back on their coverage because it became too expensive. "

• "And, by the way, it's important for a family's wages and incomes. One of the things that doesn't get talked about is the fact that, when premiums are going up and the cost to employers are going up, that's money that could be going into people's wages and incomes. And over the last decade, we basically saw middle-class families, their income and wages flat-lined."

Liberals should not fear a centrist solution that gives their President a huge victory -- especially one that ends the regressive use of gold-plated insurance for the lucky few. And conservatives should not be cheering if Obama loses on this. It will be a Pyrrhic victory, because the Dystopian Myth will survive and amplify.

Comments

[Dan Weber]

Can economists of the left, center, and right get together to write an open letter calling for repealing the tax-free status of employer-provided health benefits?

To be politically sellable, it would need to have either a tax reduction or a tax credit so the middle class doesn't get a tax hit.

[Tim Kane]

Great idea, Dan.

[Billy]

free up the insurance companies and allow them to compete! With the ridiculous laws already surrounding health care, we haven't seen a market solution in years. This gov talk is more of the same, including painting the bureaucracy we already have as "market". Check out John Mackey's market solutions as a starting point (search: whole foods ceo health care)

[Derek]

How can you support Wyden-Bennett and free market capitalism in the same entry? Either you support free markets or you don't. There is no middle ground. Economic growth is a byproduct of free markets. If you want to fix health care, treat it like any other good or service. Getting the government involved is not only unconstitutional, it's ineffective and completely not free market.

[boys clothing boutique]

Where can i have more info on this ?

Regards

[Youngsville Car Care]

You got a nice blog up there.