Bad Economics Disguised As Healthcare Reform

Several times in the past year or so, I've written critically of Boone Pickens and his ilk crying that Americans spend "too much" on imported oil.

How, may we ask, can Boone know what "too much" is? Price is the economic allocator of scarce resources. Ostensibly, those Americans who have bought petroleum products refined from imported oil did so because they had uses for the oil more valuable than its price.

It's the same with health care.

A recent Wall Street Journal editorial, Craig Karpel claimed we are spending too little on health care, not too much. Why? First, he notes some very sensible economic facts,

"Mr. Obama has said that "the cost of health care has weighed down our economy." No one thinks the 20% of our GDP that's attributable to manufacturing is weighing down the economy, because it's intuitively clear that one person's expenditure on widgets is another person's income. But the same is true of the health-care industry. The $2.4 trillion Americans spend each year for health care doesn't go up in smoke. It's paid to other Americans.

The basic material needs of human beings are food, clothing and shelter. The desire for food and clothing drove hunter-gatherer economies and, subsequently, agricultural economies, for millennia. The Industrial Revolution was driven by the desire for clothing. Thus Richard Arkwright's water frame, James Hargreaves's spinning jenny, Samuel Crompton's spinning mule, Eli Whitney's cotton gin and Elias Howe's sewing machine.

Though it hasn't been widely realized, the desire for shelter was a major driver of the U.S. economy during the second half of the 20th century and the first several years of the 21st. About one-third of the new jobs created during the latter period were directly or indirectly related to housing, as the stupendous ripple effect of the bursting housing bubble should make painfully obvious.

Once these material needs are substantially met, desire for health care—without which there can be no enjoyment of food, clothing or shelter—becomes a significant, perhaps a principal, driver of the economy."

These are important and reasonable statements. It's simply ludicrous for anyone, especially an economically illiterate, newly-elected, politically-immature president to state that any one sector has "too much" spent on it, when that spending is the result of consumer choice.

Then, for the first time in my memory, I actually read a cite of some economic research on the topic. Karpel continues,

"In a 2007 study, Stanford University economists Robert E. Hall (who will take office next year as president of the American Economic Association) and Charles I. Jones reported that modeling they've conducted has found that mid-21st century U.S. health-care expenditures would optimally amount to 30% of GDP or more. They wrote:

"We examine the allocation of resources that maximizes social welfare in our model. We abstract from the complicated institutions that shape spending in the United States and ask a more basic question: from a social welfare standpoint, how much should the nation spend on health care, and what is the time path of optimal health spending? . . .

"Viewed from every angle, our results support the proposition that both historical and future increases in the health spending share are desirable. . . . [W]e believe it likely that maximizing social welfare in the United States will require the development of institutions that are consistent with spending 30 percent or more of GDP on health by the middle of the century." "

As our life expectancy increases, is it not reasonable to expect that we, as a nation, will spend more of our increasing disposable income on health care? More people are more active at older ages than in decades past. Joint replacements are more common.

Why should our government unilaterally decide how much is "too much" health care for Americans to buy?