U.S. Health Care Reform and the French Experience

The Council of Economic Advisers (CEA) published yesterday a report on The Economic Case for Health Care Reform . Excerpt:

“We estimate that slowing the annual growth rate of health care costs by 1.5 percentage points would increase real gross domestic product (GDP), relative to the no-reform baseline, by over 2 percent in 2020 and nearly 8 percent in 2030.”(page 2).

This assertion seems a bit surprising at first: why should a decrease of the growth rate of any economic activity boost GDP growth? The explanation is to be found on page 4:

“It would prevent disastrous budgetary consequences and raise national saving. Because the Federal government pays for a large fraction of health care, lowering the growth rate of health care costs causes the budget deficit to be much lower than it otherwise would have been (assuming that the savings are dedicated to deficit reduction). The resulting rise in national saving increases capital formation.”

Obviously, where health care spending is financed by taxes, more taxes mean less growth. Indeed, European countries which adopted such a Bismarckian model after WWII are now burdened by very high and increasing tax levels, and slow growth. They have been trying for decades to bureaucratically ration health care spending, to no avail. It is now clear that tax financed health insurance has eroded, not stimulated growth, because of the disincentive effects of higher taxes on labor.

Maybe the CEA members should have a look at my recent report, published in the French review Commentaire (“Comment gagner plus?”, Printemps 2009, available on my homepage, here ), in which I suggest that while the government should subsidize the personal buying of health care insurance for lower income families it should avoid the trap of providing directly tax financed public health insurance in the Bismarckian welfare tradition. The difference of tax levels between Europe (and especially France) and the U.S. is due mainly to the tax on labor that funds universal public health care, and this difference goes a long way to explain the quite different growth rates of GDP on both sides of the Atlantic.

The CEA should look closely at the European experience for fear of repeating the same mistakes.