Will Healthcare Reform Help The Economy?

After earlier dissecting Larry Summers' claim that the Obama administration is responsible for the economy's improvement, I wanted to address another assertion made in his recent letter (opens .pdf-like document) to Congress. He also outlines the path he believes the country needs to take for future economic prosperity. He says one of those steps is healthcare reform. Let's think about his logic.

Here's what he says:

Comprehensive healthcare reform is crucial to convincing markets that the long-term growth in Federal debt is under control and to convincing businesses that the United States is the most competitive place for them to invest.

I don't pretend to be the foremost expert on healthcare, or the government's precise plans for reform. But I am pretty sure that the following assumptions are generally accepted in Washington, particularly by the Obama administration:

1. If left untouched, healthcare costs will increase.
2. Healthcare reform would reduce costs.
3. An explicit goal would be for the government to pay for healthcare for those who cannot afford private coverage.
4. Healthcare reform must be deficit-neutral, which means that taxes must be raised to pay for it.

Okay, now let's think about Summers' two assertions.

Reducing The Federal Debt

First, will healthcare reform convince markets that the long-term growth in Federal debt is under control? Let's imagine that markets weren't worried about runaway spending, just entitlement costs, like Medicare and the public healthcare option, if enacted.

No matter the precise numbers, for Summers' argument to make sense, Medicare savings would have to exceed the cost in covering health insurance for poor Americans. I find that incredibly hard to swallow. I know there is a lot of mathematical magic out there suggesting that new healthcare boards and other such measures will eventually reduce costs further, but the number of covered Americans on a public plan will also increase over time, which might neutralize any additional savings to Medicare. Making projections more than ten years out is a lot more art than science (as the Wall Street Journal notes in an editorial today).

Healthcare reform advocates would argue that this equation leaves out a variable: tax increases to help pay for the public option. Reform will be deficit-neutral. Sure, but you could similarly just raise taxes to better pay for Medicare cost increases without a public healthcare option. You could just make Medicare itself deficit-neutral through tax increases.

Here's another interesting wrinkle: if Americans have better healthcare, they should live longer. That means Social Security expenses -- another massive entitlement -- will also increase. This would add to the Federal debt, as Social Security is not self-sustainable, so any cost increase absent of an increase in taxes will increase U.S. debt. I'm not saying that the government should want people to die sooner, but helping them to live longer will increase entitlement costs going forward, and the debt.

Increasing Business Investment

Summers also claims that business investment will increase through healthcare reform. If I understand the argument here, individuals will be more inclined to embrace entrepreneurial activity if they don't need to rely on employer-based health benefits. That would increase investment.

Are there really people out there who would have started a business, but didn't, because they were worried about not having healthcare? And if so, are they so plentiful that they the businesses they would start if covered by a public option would cause a meaningful increase in investment? I haven't met any, but maybe I'm talking to the wrong people.

Or maybe I'm misunderstanding the administration's argument, and instead, the idea is that small businesses would have an easier time growing if they did not have to entice employees with healthcare benefits. That could be true, but I think that would mostly depend on how healthcare reform is paid for. According to a Wall Street Journal article from a few weeks ago, the House's proposal would tax even relatively small businesses if they did not offer healthcare:

Under the House measure, employers with payrolls exceeding $400,000 a year would have to provide health insurance or pay the 8% penalty. Employers with payrolls between $250,000 and $400,000 a year would pay a smaller penalty, and those less than $250,000 would be exempt. Certain small firms would get tax credits to help buy coverage.

If that was taken off the table, then perhaps it would help small businesses not to have to pay for healthcare. But another often talked-about source of new tax revenue might also hurt investment: raising taxes on the rich. The rich have a lot more money to invest than the poor, but if you tax them more in order to pay for healthcare reform, then the rich will have less money to invest. I would be stunned if that did not decrease business investment.

I think the moral argument is a lot more compelling for healthcare reform than the economic argument. If you believe healthcare is a natural right, then you can argue that based on philosophical rationale. If you believe it's an economic necessity, then you can attempt to argue that too. But first, you'll just need to come up with some better arguments than the two Summers relies on in his letter.