Gladwell on Nationalized Health-Care Coverage

by Don Boudreaux on August 25, 2006

in Health, Myths and Fallacies

Malcolm Gladwell’s most recent New Yorker column is already the target of a good deal of deserved criticism.  See Arnold at EconLog and Jane at Asymmetrical Information.

I here pile on.

In his column Gladwell falls for the myth du jour of those who agitate for government-supplied universal health insurance — namely, that the need for American companies to pay much of their workers’ health-insurance premiums puts American firms at a competitive disadvantage compared to firms in countries where such insurance is supplied by government.  Gladwell approvingly quotes investor Wilbur Ross:

“Every country against which we compete has universal health care,” he
said. “That means we probably face a fifteen-per-cent cost disadvantage
versus foreigners for no other reason than historical accident. . . .
The randomness of our system is just not going to work.”

There’s plenty wrong with the idea of government-supplied health insurance.  But this argument — that failure of Uncle Sam to supply health-insurance to all Americans puts American businesses at a "cost disadvantage" — is nonsense.

First, and least interestingly, this idea ignores the possibility of private methods of supplying health insurance that differ from the current employment-based method now in widespread use throughout the United States.

Second, this idea ignores the principle of comparative advantage.  Even if all American producers suffer production-cost increases of 15 (or whatever) percent, some American firms will nevertheless enjoy a comparative advantage in production compared with foreign firms.  The continued relevance of the principle of comparative advantage does not mean that such cost increases are inconsequential; Americans will be poorer than otherwise if American producers are burdened with the need to pay higher costs without any offsetting increase in quantity or quality of output.  But the problem isn’t international "competitiveness"; many American firms will continue to export.  The problem is costs that are unnecessarily high — a problem that ultimately is reflected in lower standards of living of consumers who buy from, and workers who work for, American businesses.

Third, and most fundamentally, the idea that having government supply health-insurance will improve the efficiency of the U.S. economy is nonsense.  As my friend George Leef points out in an e-mail to me, if government can lower firms’ costs by paying workers’ health-insurance premiums, why stop there?  Why not have government also pay all expenses involved in hiring workers, including all wages? — and pay for all property, casualty, and liability insurance? — and pay for all raw-materials? — and pay for all capital equipment? — and pay for all R&D?  — and pay for all advertising? — and pay for all production facilities and other real-estate used by firms?  If government picks up the bill for all that firms produce, firms’ private costs can be pushed down close to zero!

Imagine, then, how "competitive" — how very efficient — American industry will become!
….
Already I hear the retorts: "Oh come on!  No one is suggesting any such extreme involvement by government in industry — merely government supplying universal health-insurance coverage."  But I then reply: Government can only pay $X for something if it takes $X from something.  So where will the $X that government pays to supply universal health-insurance come from?  The activities from which this $X is taken will likely become less efficient; less productive; suffer higher costs.

"Not quite," my imaginary opponent responds.  "Businesses will enjoy offsetting cost reductions — namely, relief from having to pay health-insurance premiums for their workers."

So I then ask again: why not have government pay for everything businesses use?  If Gladwell’s (and investor Ross’s) theory is correct, such a policy will cause taxes to skyrocket, but it will also cause firms’ private costs to plummet.  The latter effect will at least offset the former.

"Don’t be ridiculous," my opponent snarls at me as if I’m being intentionally stupid.  "Reductios prove nothing.  Besides, health coverage for workers is different than steel used to produce cars or insurance for protecting against financial loss due to fire."

And so it is different, I concede, in countless details.  But I don’t see which of these differences makes government provision of universal health insurance likely to increase the economy’s efficiency.  The far more likely outcome is that nationalized health-care coverage will unleash gargantuan free-rider problems and, in their wake, ever-expanding mountains of red tape aimed at solving this unsolvable problem.

UPDATE: Agoraphilia’s Glen Whitman adds this important point.

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