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Contrary to Claims, Government-Run Health Care Won't Reduce Costs or Boost Economy

Shikha Dalmia
May 6, 2009, 10:20am

My new column on the economic impacts of President Obama's health care plan is up at Forbes.com:

At the president's behest, Democrats are exploring ways to ramrod a health care reform bill through Congress this fall by using procedural shenanigans to avoid a Republican filibuster. In his budget, Obama has already proposed an additional $634 billion--nearly three-quarters of a trillion dollars--in health care spending over the next few years. If he gets his way, this money will be the first installment toward a government insurance plan that will compete with private plans to allegedly put affordable coverage within everyone's grasp.

But whatever else universal coverage might bring, there is no evidence that it will bring economic nirvana. If anything, contrary to what the president suggests, the correlation runs the other way for countries with universal coverage such as Canada, England, France, Germany and Japan. On nearly every economic front, their performance has been worse than America's--even, surprisingly, in controlling health care costs.

Contrary to popular perception, even though America is at the epicenter of the financial crisis, it has suffered less than its industrialized peers in terms of economic growth. According to the latest International Monetary Fund figures two weeks ago, the U.S. economy actually grew 1.1% last year even as Japan's shrank by 0.6%. France and England's both grew 0.7%, and Canada's only 0.5%--or less than half of America's. Only Germany did slightly better at 1.3%.

What's more, despite all the gloom and doom about the American economy, IMF expects its gross domestic product to shrink 2.8% this year compared to anywhere between 3% (France) to 6.2% (Japan) for these other economies. (Figures from the U.S. since the IMF projections suggest that the U.S. economy contracted more than expected in the first quarter of this year but it is not yet clear how the other countries performed.)

Not only is America hurting relatively less now, its economic performance in the prior 18 years--from 1990 to 2007--has also been visibly better than everybody else's. Calculations based on Department of Agriculture data show that America's GDP grew at an average annual rate of 3% during this period. By contrast, Canada's grew 2.88%; England's 2.3%; France's 1.92%; Japan's 1.74% and Germany's 1.59%.

Besides experiencing lower growth rates than America in the past, with the exception of Japan, these countries have also experienced chronically higher unemployment rates. Setting aside last year, between 1997-2007 America's peak unemployment rate was below its peers by anywhere from 1% (Canada) to 5.7% (France). Japan has always had an unusually low unemployment rate, never hitting over 5.3% partly because of its policy of guaranteed employment in urban areas that forces workers to share jobs to keep more people employed.

All of this has made Americans much wealthier than all these countries, given that Americans' per capita income in 2006, adjusted for purchasing parity, was about $6,000 more than the next country, England.

But are these countries fiscally stronger? Not by a mile. European countries started reining in their soaring deficits in the years prior to the downturn, thanks to the European Union's requirement that these levels not rise above 3% of GDP. But that meant that they had to either dismantle their social spending programs--including universal health insurance--a politically difficult task, or maintain their sky-high taxes. For the most part, they have chosen the latter.

The upshot is that whereas America's 2007 taxation rate was 28.3% of GDP, Canada's was 33.3%; Germany's 36.2%; England's 36.6% and France's 43.6%. Japan's taxation level of about 28% is at par with the United States'--but only at the price of a government debt that totaled a jaw-dropping 170% of GDP last year, nearly three times that of America's. Such taxation rates have left these countries limited room to respond to crises, which is why European countries roundly dismissed Obama's calls to increase stimulus spending right now.

The trillions of dollars that this administration is spending to stimulate the economy might be a complete waste of money. But such wastage is a luxury that America can afford because of its relatively lower tax-and-spend burden.

The one remaining economic argument for universal health insurance in the United States is that it will help rein in medical costs. The rap against America is that it spends over 15% of its GDP on health care--more than any other industrialized country--and yet leaves upwards of 45 million people uninsured. If it had universal coverage, the theory goes, uninsured folks would get care sooner--not wait till they have a medical emergency--saving the system a ton of money.

It is a nice theory, but there is no evidence that it is true. Although America's per capita health care spending soared in the 1980s, a 2007 study by Kaiser Family Foundation found that it slowed considerably in subsequent years. Indeed, between 1990 and 2003, the rate of growth of America's per capita spending was 3.6%, only a little bit higher than France, Germany and Japan's--but significantly lower than England's 4.2%. That's striking given that England engages in the most aggressive rationing known to the free world, routinely delaying care to patients unless they are critically ill.

However, Canada, which too indirectly rations care for many specialized treatments by putting patients in queues, has succeeded in limiting per capita spending to 2.4%. At best, then, universal coverage has a mixed record in controlling health care spending increases, even after resorting to rationing.

Rest of Column Here

Reason Foundation's Universal Health Care Commentary


Shikha Dalmia is Senior Analyst


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