Arnold Kling  

Free Lunch!

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You, Too, Could be Doing This... The Bizarre World of Regulatio...

The President's Council of Economic Advisers writes,


We estimate that slowing the annual growth rate of health care costs by 1.5 percentage points would increase real gross domestic product (GDP), relative to the no-reform baseline, by over 2 percent in 2020 and nearly 8 percent in 2030.

In other news, cold fusion will increase real GDP relative to a no-cold-fusion baseline by nearly 22 percent.

The CEA alludes to the "difficulties involved" in controlling cost, but they do not come close to spelling out what those difficulties really are. The problem of health care costs is this: If you allow people to have unlimited access to medical services without having to pay for them, consumers and their doctors will elect medical procedures with high costs and low benefits. You have to either limit access (through rationing or supply constraints) or change to a consumer-driven system with a much higher share of out-of-pocket spending. Neither of those is a free lunch in terms of being painless to implement.

If you need someone to tout health care reform as a free lunch, you can always find a political hack to do the job. It's not a function for the Council of Economic Advisers.


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COMMENTS (13 to date)
redbud writes:

I vote for everyone having very high deductibles. If you are paying, you become the rationing agent, not the government. If it's not worth it to you, it's not worth it to any other taxpayer.

Gamut writes:

I never understand how the same people who sing the praises of stimulus spending could simultaneously see an economic benefit to cutting health care costs.

Prakhar Goel writes:

"If you need someone to tout health care reform as a free lunch, you can always find a political hack to do the job. It's not a function for the Council of Economic Advisers."

Dear Arnold, what do you think the people on the CEA are if not political hacks there to provide cover for whoever is in charge?

fundamentalist writes:

You can have just two of the following three traits of any good or service--quality, cheap, or quick. You cannot have all three.

gnat writes:

"The problem of health care costs is this: If you allow people to have unlimited access to medical services without having to pay for them, consumers and their doctors will elect medical procedures with high costs and low benefits."

Why is this the problem?
My health care costs are my costs--they are part of my salary and businesses certainly have strong incentives to reduce the amount they are willing to pay as health costs rise. Insurance companies that bid for business health plans certainly have strong incentives to reduce costs. Moreover, individuals that are risk adverse and can are willing to pay for adequate health care insurance. Group rates in business risk pools appear to work for those who can purchase these plans.

The problem appears to be one of market (mis)design. What is currently priced is health transactions rather than healthy outcomes. Much of the current cost inflation could probably be eliminated by clear market information.

ed writes:

This report made me ashamed to be an economist. It really was surprisingly shallow. I say this as someone who voted for Obama.

Who actually wrote the report? I don't see any names. It's hard to believe Austan Goolsbee would have written something this vapid.

B.B. writes:

I have become convinced that health care "reform" is the supply-side economics of Democrat liberals.

Instead of each and every tax cut paying for itself, every health care reform will pay for itself. (Buying toxic bank assets and nationalizing auto companies also pay for themselves, if you weren't paying attention.)

I would have supposed that health care "reform" would have resulted in the same size real GDP in say 2030, but a small slice of it would be health care and larger slice in non-health care.

But the wunderkind of the Obama regime can do better than that. They can raise the permanent long-term rate of productivity growth in the whole US economy by a significant amount, via health care reform! Truly amazing. And they can do that by having the government own things, tax things, and order people about. Very truly amazing. There is ample precedent for such miracles in other industries in other countries. No doubt.

The potential for a stunning rise in productivity has been sitting in front us for decades, and dimwits in the private-sector never bothered to notice. Most strange.

The CEA report may be the shoddiest piece to come out of CEA in 60 years. Goolsbee is not in CEA, but that report may well have been written by him.

Where is the evidence that the authors of that report actually know anything about the huge and complex medical industry or the complexities of treating sick people? It was nothing but an arid and scholastic exercise in an Excel spreadsheet. The authors really ought to stick to calibrating DSGE models.

Mark writes:

I would go further than BB and say universal health care is to the left as invading Iraq was to the neocons. Both demonstrate a pre-existing commitment to a certain course of action based on an ideologically driven overstatement of the problem, despite high risk that the actions will cost far more than predicted and will generate large negative consequences that will likely worsen the pre-existing state of affairs, all of which are dismissed with the wave of a hand and attacks on the good faith of the program's opponents.

Victor writes:

From the report: Because the Federal government pays for a large fraction of health care, lowering the growth rate of health care costs causes the budget deficit to be much lower than it otherwise would have been (assuming that the savings are dedicated to deficit reduction). The resulting rise in national saving increases capital formation.

Together, these effects suggest that properly measured GDP could be more than 2 percent higher in 2020 than it would have been without reform...

So, the CEA assumes that Medicare cost cuts will go to deficit reduction which in turn boosts GDP, while elsewhere on the same day the Administration is touting Medicare cost cuts that can be used to pay for increased federal spending on subsidies for its healthcare reform. Oops, there went the boost to GDP. I guess the CEA didn't get the memo.

dsimon writes:

Boy, there's a lot of mischaracterization going on in some of these comments.

Health care is not as ideologically driven as, say, the Iraq invasion, because there's some evidence to go on. European countries get roughly equivalent health outcomes while we spend almost twice as much per capita as they do. So it seems pretty clear that there's plenty of room for a more efficient system here that will not lead to substantially worse outcomes.

Also, no serious liberal asserts that buying toxic assets or auto bailouts would pay for themselves, only that they were the better of many bad choices. People can disagree with that assessment, but let's not misstate the opposition's position to set up a straw man.

Finally, it's perfectly possible to support temporary stimulus spending and advocate for reducing health care costs. Those costs won't be brought down anytime soon; they'll go into effect after (hopefully) the economy has recovered when we want more efficiency and will be dealing with debt reduction.

Serolf Divad writes:

If you allow people to have unlimited access to medical services without having to pay for them, consumers and their doctors will elect medical procedures with high costs and low benefits.

I don't see how you can categorically make this sort of statement. Yes, cost will no longer be a guiding factor under this scenario, but the sheer inconvenience of medical treatment will, in and of itself, continue to encourage people to choose treatments with high benefits. No one wants to undergo a plethora of unnecessary or marginal medical treatments when just one effective one will do the trick.

Plus there's nothing magical about government insurance vs. private insurance. In both cases, the patient is not seeing the bill directly. The biggest difference is that under a private scheme, the insurance provider has a profit motive to lower costs. Under a public scheme it is budgetary constraints that demand cost cutting.

The only case in which an individual has to curtail his or her use of medical care is when that individual is financially responsible for some or all of said treatment, in other words, when he is uninsured or under-insured. And sure you're not arguing that people shouldn't be insured at all.

mark writes:

dsimon writes in response to my comment:
"Health care is not as ideologically driven as, say, the Iraq invasion, because there's some evidence to go on. European countries get roughly equivalent health outcomes while we spend almost twice as much per capita as they do. So it seems pretty clear that there's plenty of room for a more efficient system here that will not lead to substantially worse outcomes."


First, nothing in my comment suggested there was no evidence to go on. I said the proponents overstate the problem as the neocons did re Iraq. A good example of the overstatement is the PNHP study released yesterday which is rightly being carved up in among other places, Megan McCardle's blog. There was certainly "some evidence" to support the thesis that Saddam was a homicidal madman who had WMD: the problem was while the homicidal madman part was well supported, the WMD part was not. Certainly "some evidence" ought not be the standard for multi trillion dollar decisions.

Second, while there is definitely reason to believe that health care efficiency can be dramatically improved (even without getting into the question of whether the reason European statistics are better lies in their healthcare system or their differences re guns, autos, population composition and other factors), there is no evidence or logic to suggest that rapidly expanding demand by universal healthcare is part of the solution. Whereas there is some evidence and all the logic in the world to suspect that rapidly expanding demand without commensurate supply increases will produce massive price increases and or bottlenecking which was what I meant by a substantially worse state of affairs.

And it is the failure to honestly account for the downside risks and the imperative attitude of a back-in-power party that reminds me of the Rumsfeldians in Iraq.

John Fembup writes:

"I would go further than BB and say universal health care is to the left as invading Iraq was to the neocons. "

I would only add that an exit strategy is conceivable for Iraq.

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