As the nation's political leaders ponder how to keep the American job machine going in the years ahead, they might do well by studying the Sept. 26, 2006 issue of BusinessWeek. That issue's cover features a nurse flexing her biceps, along with the headline: Health care has added 1.7 million jobs since 2001. The rest of the private sector? None. Indeed, it can fairly be said that without the strong annual growth in health spending during President Bush's first term in office, that term would have been an economic disaster. Healthcare alone contributed 37% of gross domestic product growth from 2000 to 2001 and 39% from 2001 to 2002.
It is not that the nonhealth private sector failed to create any new jobs from 2001 to 2006. The problem is that whatever new jobs the private sector created outside of healthcare in that period were offset by job cuts elsewhere.
The current conventional wisdom in Washington appears to be that temporary or permanent tax cuts are the only legitimate form of fiscal policy. The private spending on consumer goods or investments triggered by tax cuts is always thought to yield high social value. By contrast, added government spending on anything other than defense is thought to be inherently wasteful, on the theory that it would produce little in the way of social value and therefore would be a drag on the economy. Remarkably, this line of thinking is applied to government-financed healthcare given to hitherto underserved poor or elderly Americans. Some budgeters in Washington even wring their hands over government spending on healthcare for our veterans.
Permanent tax cuts, such as an extension of the Bush tax cuts, usually are defended as a supply-side strategy, because they are thought to make people work harder or to encourage job-creating investments in response to lower tax rates on profits. Actually, the empirical evidence in support of this so-called supply-side theory is much weaker than seems widely assumed.
Americans already work more hours per person per year than do people in most other industrialized nations, often at more than one job. Furthermore, anyone who has participated in the financial evaluation of the viability of business projects knows that changes in tax rates play only a minor role in the evaluation models. The main driver in business investment models tends to be projected sales revenue, that is, projected demand for the products to be yielded by business investments. Not surprisingly, recent data published by the Organisation for Economic Co-operation and Development show that from 1995 to 2005 there has been no discernible correlation between total taxes as a percentage of GDP and the average annual growth rate in real GDP per capita in OECD member countries.
Temporary tax cuts, such as the recently passed tax rebates, are a classic Keynesian strategy to put money into the pockets of consumers, who are expected to spend that money on added U.S.-made goods and services, thus creating added jobs. The trouble is that many of these consumer goods are bound to have been imported from Asia or Europe. Tax rebates spent on them create jobs abroad, not in the U.S. Furthermore, a good part of these rebates are likely to be used merely to repay consumer debt or to add to household savings.
A striking feature of added government spending on healthcare is that it creates new jobs only in America, because all our healthcare is home-produced. Such spending diffuses quickly to all corners of the U.S., supporting all skill levels. If targeted on hitherto underserved Americans, such government spending is far from wasteful.
Media pundits, and even many Wall Street economists who should know better, routinely deplore both private and public health spending as a burden on the economy, perhaps unaware that health spending is part of GDP. To thoughtful people it is not at all clear that private spending on, say, golf resorts, fast food and SUVs adds higher value to American society than does spending to reduce the avoidable suffering and premature deaths that the Institute of Medicine has now linked to being uninsured, not to mention the sense of well-being that comes with the security of health insurance.
In fact, a group of distinguished economists argue in a collection of scholarly essays (edited by University of Chicago economists Kevin Murphy and Robert Topel) that the value of the added life years and higher quality of life enjoyed by Americans during the past half-century might well rival the value of all other consumer goods combined during that period. The authors attributed much of this added value to healthcare.
The argument here is not that every dollar of health spending produces high social value, or to defend health spending of dubious clinical merit. Waste in healthcare, as in national defense or in education, is never defensible, even if it creates jobs. Rather, the point is that more government spending on healthcare for currently underserved Americans creates both added jobs and added value, and thus can easily trump temporary or permanent tax cuts as smart fiscal policy.