U.S. Beware : Don’t Go European on Health Care Costs.

“Democrats Scramble to Cut Costs From Health Plan” titles the New York Times (June 18). The American policy debate over universal health insurance coverage is indeed replicating years of hand wringing by policymakers in Europe in general, and France in particular, about the ever rising “costs” of health care. But what do they mean by that? Does anyone deplore the rising costs of restaurants or of any other type of services, or are these costs considered a government “problem” that should be met by bureaucratic rationing? Of course not.

What creates a “cost problem” is broad or universal health insurance coverage that is financed by taxes, and taxes that all fall in fine on labor. Economists everywhere know that it is irrelevant that the tax is paid formally by employers or by employees as long as it is based in both cases on labor earnings.

Then, in such a bismarckian system, increasing health care spending becomes a “bad” since it forces increases in the tax on labor and thus reduces labor participation and GDP growth (see Edward Prescott’s work on this effect). Accordingly governments try to cut the health “costs” (health care spending), even against the demanders’ and suppliers’ will, because they somehow realize that further increases in labor tax will bring economic slowdown and stagnation.

This is the bismarckian trap in which continental Europeans fell a long time ago and vainly try to escape today, from one “rationing plan” and administrative “cost control” to another, with no avail. Governmental health insurance financing labor tax goes up steadily and GDP growth rates trend down basically because older and richer consumers want more health care, not less. This experience should help the U.S. avoid a major mistake.

How then properly insure low income families against health care risks? Instead of universal provision of government supplied health insurance (paid with taxes) make universal private buying of some health insurance compulsory, and thus reduce the total amount that has to be financed by a tax to what is necessary to subsidize the lower income families with a “health care voucher” in order to enable them to buy the same insurance coverage that is compulsory, and that richer families can easily afford.

In such a scheme there is no “socialized medicine” bias since the compulsory health insurance is bought in a competitive market from the insurer of your choice and health care can be bought from any private supplier that is recognized by the insurer. There is also a clear macroeonomic benefit to that since compulsory buying does not generate a deadweight loss comparable to that of a tax, and since the tax on labor can thus be minimized that way. In the example of France that I develop in my Commentaire paper of this spring (“Comment gagner plus”, available here ), I show that such a plan would reduce the necessary amount of the tax on labor by 2/3 (two third).

You can get then an effective social policy without the growth hindering effects of government supply of health care and its growth destructing tax finance.