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Today, I came across an article on Bloomberg about how thankful we should be that out-of-control Medicare spending is acting as a stimulus.  The article was written by Thomas Geoghegan, a labor lawyer from Chicago.

Obama is Lucky that Medicare is Out of Control

There’s a famous story about when Milton Friedman visited China.  Party officials took him on a tour of an infrastructure project, where many laborers were digging a ditch with shovels.  Friedman asked why they weren’t using heavy machinery instead.   One of the party officials responded that shoveling created more jobs.  Friedman quipped, “then why not use spoons?”

Friedman’s point was that it’s easy to “create jobs” by having the government hire people to do unnecessary work, but this does not create any more wealth.  Much to the contrary, it destroys wealth.  Thomas Geoghegan’s article seems to take the counter-point, arguing, “why not use spoons?”

The problem with arguments like this(aside from the obvious issue that they advocate massive amounts of waste) is that they often ignore the alternative.  Geoghegan imagines the exact same world we live in now, except that healthcare jobs would not have grown during the recession.  What Geoghegan fails to imagine is a world where Americans are significantly wealthier because they aren’t paying so much for healthcare, either directly (out of pocket) or indirectly (through taxes).

Healthcare spending in the US is around 17% of GDP.  In Europe, it typically averages around 10% – 12%; and frankly, the Europeans are just as inefficient as us; it’s just that they add health care rationing, long waiting times, and price controls to the mix.  In fact, if you factor in the economic costs associated with Europe’s “waiting times”, they might actually be more inefficient than the US.

Singapore, on the other hand, has an excellent healthcare system that achieves similar results as the US and Europe at a fraction of the cost. In fact, healthcare spending as a percentage of GDP is around 4% in Singapore.  Certainly, demographics might explain some of the discrepancy, but not 13% of GDP!

Singapore’s big secret:  they don’t subsidize 90% of your healthcare expenses.

I’m exaggerating a little bit, but the American healthcare system is basically designed along this premise, is it not?  Someone else pays for 90% of our expenses.  When we visit the doctor, we pay a $10 co-pay and the insurance company pays the other 90% of the price.  When we get a medication, we pay $10, and the insurer pays $70.   We’re never accountable for our costs.

Insurance serves a point and that’s to prevent us from having to make a huge, unexpected payment for a medical procedure.  If your appendix ruptures and you have to have it removed, you likely did not have the money set aside from that emergency.  Insurance allows you to pay into a system that will pool money and help mitigate this sort of risk.

But there’s no reason you need insurance to visit the doctor’s office for a routine check-up.  There’s no reason you need insurance to buy a prescription.  You need insurance for an expensive procedure.  Once you start subsidizing all expenses, regardless of how small they are, you end up in a situation where people overconsume and costs become completely unaccountable.   Meanwhile, Federal programs like Medicare and Medicaid also tend to reduce supply in the market, creating a huge supply / demand imbalance. That’s why healthcare spending is 17% of US GDP.  We are essentially digging ditches with spoons.

What Geoghegan fails to imagine is a world where US healthcare spending is 7% of GDP, rather than 17%, but that we still achieve roughly the same outcomes.   US GDP per capita is around $48,000.  That would be a giant $4,800 per capita stimulus.  That’s a lot of money!  And it’s likely that $4,800 in dead-weight loss is killing a lot of private sector jobs outside the healthcare sector.  In other words, without all the waste we currently have, the unemployment rate would like be much lower to begin with, and the majority of us would make higher real wages.

When Friedman asked “why not use spoons?”, he was making this very point.  You may be able to employ every single American by creating one giant infrastructure project where we all dig with spoons, but you’ll have to kill millions of more productive jobs to do so.   It’s likely that out of control Medicare spending has already killed many more jobs than it’s created.