Is Health Care Spending Good for the Economy?

Published April 10, 2013

The Obama administration is encouraging state governments to expand their Medicaid programs to access a pile of new federal funding. But in doing so the administration is promising more than those federal funds can probably deliver: economic growth.

The White House, hospitals, and the unions that represent hospital employees often argue health care spending is good for the economy. They tout the benefits of “economic activity” that additional Medicaid funds might create. The federal stimulus of 2008 is cited as an example; for three years—2008 to 2010—the federal government paid a larger share of Medicaid spending.  Purportedly, health care spending creates jobs, and efforts to slow spending would harm job creation. 

If health care spending does boost the economy, the spending perpetuated by ObamaCare must be a huge windfall for the country. The Congressional Budget Office has estimated the cost of ObamaCare at about $1.7 trillion over the next decade.

Yet, by some estimates one of every three dollars spent on health care is unnecessary and therefore wasteful. By default, some of ObamaCare must fit this category.

ObamaCare’s “wellness exams” for Medicare enrollees—so touted during the last election—are an example. Millions of taxpayer dollars will be spent on this service, yet there is no known medical benefit. Similarly, ObamaCare is encouraging all manner of preventive care—by requiring no deductibles or copayments—which is not cost-effective.

Spending on Broken Windows

There is a simple way to explain the fallacy of wasteful government health care spending. Suppose I throw a rock through a store owner’s window. You admonish me for this act of vandalism. But I reply that I have actually done a good deed. The store owner will now have to employ someone to haul the broken glass away, and someone else, perhaps, to clean up afterward. Then, the order of a new glass pane will create work and wages for the glassmaker. Plus, someone will have to install it.

In short, my act of vandalism created jobs and income for others.

The French economist, Frédéric Bastiat called this type of reasoning the “fallacy of the broken window.” All the resources employed to remove the broken glass and install a new pane, he said, could have been employed to produce something else. Now they will not be. So society is not better off from my act of vandalism. It is worse off—by one pane of glass.

Reborn Keynesian Fallacies

Yet all this wasteful spending could actually help the economic recovery, according to the resurrection of an old Keynesian idea called the “liquidity trap.”

Here is New York Times columnist Paul Krugman: “As some of us keep trying to point out, the United States is in a liquidity trap: […] This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken window fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.”

According to the new Keynesianism, we are in a liquidity trap when nominal interest rates hit zero. At that point, according to the theory, hurricanes and earthquakes are good for the economy. So are sudden increases in the price of oil, for example. As economist John Cochrane has noted, “‘Fiscal stimulus’ is the prediction that even completely wasted government spending is good for the economy.”

But not even Ezekiel Emanuel, former White House advisor on health care issues, agrees with this broken windows fallacy.

“It’s clear that, far from creating unemployment and hurting the economy, the more we can control health care costs, the more Americans will prosper,” Emanuel recently wrote in the New York Times.

The truth is, health care is about keeping people healthy or fixing them up when they get sick. It is not a jobs program.