Friday, January 26, 2007

Bush's healthcare proposal

If you haven't been following the healthcare discussion over at MR, you should. Either that, or just stop voting or paying any attention to politics. I'm almost there myself. First, Krugman succinctly describes the two sides of the issue in economic terms. Next, Alex shows why Joan Robinson's quote, like a fine wine, is getting better everyday.

This is another example where knowing a little history can be more useful than having a PhD in economics. Healthcare spending was roughly 4% of GDP between 1925 and 1955. Then it began a steady growth rate and today it is 16% of GDP. The only blip occured in the 1990's, when the HMO revolution briefly reduced the growth rate to zero. So, what happened in 1955 to start this madness?

That's what I asked Robin Hanson last night in health economics class, and I didn't get a satisfactory answer. He mentioned something about FDR's price and wage controls. Indeed, according to this article, that caused employers to offer other benefits, including health insurance. Then, in 1942 the federal government started subsidizing employer sponsored health insurance. What do you think happened? As the article mentions, the number of people insured by employers went up 12 fold between 1946 and 1957, to roughly 32 million. That must have been a significant part of the insurance market, and likely big enough to effect prices. That is, those 32 million got the gold-plated ball rolling. The law of unintended consequences strikes again.

I have to say Bush is right on this one: out of control health care costs do seem to be linked to employer sponsored health insurance. Unfortunately, his proposal is an arcane bunch of exemptions which can be spun in any direction the pundits choose. Why can't he just propose banning all exemptions, deductions, subsidies, and loopholes, and "level the playing field" that way? Oh, that's right, because without the lobbyists' money, the Republican party would go broke.

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