Economics for Dummies

Y ou probably missed it. But a new school of economics was unveiled last week shortly after health care reform passed the House of Representatives. Speaker Nancy Pelosi stepped to the podium in the House chamber and said the legislation will “unleash tremendous entrepreneurial power” and create millions of jobs. “Our economy needs something new, a jolt,” she said. And she and her Democratic colleagues had just delivered it.

Pelosi, author of the new departure in economic thinking, said we should now “imagine a society and an economy where a person could change jobs without losing health insurance, where they could be self-employed or start a small business.” With health care reform, “their entrepreneurial spirit will be unleashed.”

That’s not the half of it. While insuring 32 million more people, making insurance “more affordable for the middle class,” producing “a healthier America through prevention, through wellness and innovation,” and a whole lot more—in addition to all that, the legislation creates “4 million jobs in the life of the bill and [does] all that by saving the taxpayer $1.3 trillion.”

The proper response if you believe Pelosi even a little bit is, “Thank you, Nancy!” or perhaps simply, “Wow!” But restrain yourself. Pelosi has a gift for economic lunacy. This wouldn’t be especially worrisome, except Pelosi is second in line to the presidency and would be prime minister if we had a parliamentary system. 

So far as I know, Pelosi is the first person in the universe to regard the lack of portability of health insurance as a deathblow to entrepreneurship. This idea is, to put it mildly, farfetched. Is there evidence that budding entrepreneurs have been deterred by the fear of losing health insurance for a spell? Don’t bet on it. Are future Michael Dells or Ted Turners or Pierre Omidyars suppressing their entrepreneurial juices because their doctor visits aren’t covered? Please.

Pelosi, as is the habit of Democrats, cited an uncheckable and probably imaginary case. “If they had a child with diabetes who was bipolar  …  they would be job-locked,” she insisted. Maybe so. But a job-locked entrepreneur? It’s surely overkill to revolutionize our entire health care system for the sake of that rare bird. Besides, there’s COBRA, the federal law that permits an employee who quits to stay insured for months.

The prospect of 4 million new jobs as a result of health care reform is also fanciful. It’s based on a study by two economists sponsored by the Center for American Progress (CAP), an advocacy group for liberal Democratic legislation. The study claims the reform legislation will modernize the health care system, generate administrative savings, slow the growth in insurance premiums, and allow businesses to hire between 250,000 and 400,000 employees a year for a decade.  On the basis of this, Pelosi acts as if 4 million new jobs are a slam dunk.  She actually appears to believe it.

The problem is the assumption about savings.  Any savings from modernization are likely to be more than offset by medical breakthroughs that balloon the cost of care. The Beacon Hill Institute in Boston, using a less rosy scenario than CAP, reached the more realistic conclusion that health care reform will destroy 120,000 to 700,000 jobs over the next 10 years.

The CAP study echoes one of Obama’s cherished claims. Since his days as a presidential candidate, he’s been insisting reform will “bend” health spending downward. But this is more than a stretch. It’s a dream. History tells a different story. When free or subsidized health care is offered by the government (Medicare, Medicaid), the cost far exceeds initial (and later) projections. This has been the case for state as well as federal programs. Indeed, it’s a worldwide phenomenon. The one exception is the Medicare prescription drug benefit, which uniquely relies on free market competition. Pelosi, true to form, wants to replace that competition with price controls.

Pelosi is a faithful believer in the notion you can defy the laws of economic gravity and get more for less, once government steps in. Logic suggests otherwise. Health insurers will be forced to offer more benefits, including free preventive care, no annual or lifetime limits on coverage, and insurance for those with preexisting conditions. That’s just for starters. New taxes will be imposed on insurance companies and medical device manufacturers. A package of new benefits and tax hikes is hardly a recipe for cheaper premiums and lower overall health care costs.

Companies have already begun to figure out that their cost of doing business will rise, which means they won’t be hiring. Layoffs are more likely. Medtronic, which makes medical implements, said it might have to cut 1,000 jobs. It’s not only what businesses will pay for health insurance that is bound to increase. They’ll lose a tax break for providing drug coverage for retirees. And they’ll pay a higher Medicare tax for each employee.

There is one potential cost-cutting measure in the health reform legislation. High-cost, “Cadillac” insurance plans will face a 40 percent tax, which is certain to kill such plans and trim insurance costs.

But wait a minute. Pelosi didn’t like that tax. Four days after the reform bill passed, the Senate and House passed a second measure, dubbed “reconciliation.” Among other things, it delayed the 40 percent tax until 2018, a pretty good indication that the tax will never be levied.

Pelosi was in a joyful mood when reconciliation sailed through the House. It boosted health care spending, increased regulation, raised doctors’ fees, and added new taxes. Nonetheless, she asserted: “With this legislation in place, families will have access to even more affordable care” [emphasis added]. Her perverse school of economics had been vindicated again.

Fred Barnes is executive editor of The Weekly Standard