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June 4, 2009
Health Reform Distortions
If economists were subject to the same ethics requirements as insurance agents, Christina Romer, the chair of President Obama’s Council of Economic Advisers (CEA), would be looking for a new career.
Insurance agents are legally prohibited from making false or misleading statements. Penalties vary by state, but an agent who violates ethics guidelines may face monetary fines, loss of their insurance license, or even jail time.
Unlike insurance agents, President Obama’s economic advisers face no limits on making false or misleading statements designed to confuse consumers. As evidence of this, consider a June study by the CEA listing several benefits that would result from lowering the annual growth rate of health care spending by 1.5 percentage points, including:
• Increase gross domestic product by 8 percent in 2030
• Increase family income by $10,000
• Reduce unemployment by 500,000 people per year
Here is a pop quiz on how CEA analysts concluded that President Obama’s reforms would generate such significant benefits:
a) They relied on complex econometric models calculating the potential savings from his proposed reforms.
b) They conducted an exhaustive literature review of academic research on health care reform.
c) They made it up.
If you guessed “c,” go to the head of the class. All of the benefits that the CEA attributes to President Obama’s health care plans are based on nothing but a political “goal.” The bogus study released by the CEA simply assumes that President Obama will reduce health care spending increases by 1.5 percent per year, then lists pages of resulting benefits for the unquestioning media to report.
If President Obama’s reforms really reduced spending increases by the promised 1.5 percent per year, there could be several economic benefits. And if I looked like Brad Pitt, I could be starring in the new Quentin Tarantino movie.
In reality, the CEA study unwittingly demonstrates how President Obama’s plan would actually increase health care costs. The study accurately notes that the share of U.S. Gross Domestic Product (GDP) devoted to health care almost doubled between 1980 and 2007.
As Paul Harvey might say, “and now, the rest of the story”: During the same time frame, the share of health care spending paid for by the government increased by 10.1 percent, while the share paid for privately decreased by 7.3 percent.
President Obama plans to increase the share of health care spending paid for by the federal government by expanding spending on Medicaid and children’s health care (SCHIP) while creating a brand-new government plan for everyone else. Based on historical trends, that means an even larger share of U.S. GDP will be devoted to health care in the future.
This means the actual results of President Obama’s reforms will be the opposite of those alleged by his Council of Economic Advisers: Lower GDP, reduced family income, and increased unemployment.