The Conventional Wisdom About Government Health Care Spending Is Wrong

This sentence is a pithy summary of the centrist conventional wisdom about taxes, spending, debt, and health care:

"The political impasse facing the U.S. arises from one simple reality: Americans want an increasing government contribution to health care, but don't want to pay for it."

That's James Hamilton, an economic professor at the University of California, San Diego, at his excellent Econbrowser blog. It's an utterly reasonable-sounding judgment that can lead you to the wrong conclusion. Health care isn't just a government spending problem. It's an everybody's-spending problem.

First, some basic facts about government spending on health care. Federal medical spending as a share of GDP has increased from about 1 percent of GDP in 1950 to almost 9 percent of the economy today. 

Meanwhile, tax revenues have clung stubbornly to their long-run 19 percent average...

... and gross government debt (which is slightly different from publicly held debt) has retraced the path it took during WWII to 100 percent of GDP.

So, this creates the illusion that Americans are clamoring for more health-care spending from the government while steadfastly refusing to pay for it.

Public polling reveals a more complicated picture: Americans want affordable health care, above all, and are ambivalent or skeptical about both the current system and government efforts to change it. Overall public support for universal health care has declined to less than 50 percent in the last decade, and it has plummeted since 2007 by 20 percentage points. Support for Obamacare has struggled to rise above 50%. For the last 25 years, Americans have often said that the two most urgent health care issues have been access and cost.

Access and cost are exactly what families should be worried about. Since the 1970s, the share of the economy devoted to health care has increased from 7 percent in 1970 to 18 percent in 2010. Health care costs per capita have grown an average 2.4 percentage points faster than the GDP since 1970.

This is a government spending problem, because today's government is in the business of ensuring that the old and poor don't go bankrupt on health care. As you can see in the chart below, this has had the effect of taking out-of-pocket spending from practically half of health care spending in 1960 to merely a ninth in 2010. The growth in subsidized employer insurance and government spending has basically made up the difference.

But more broadly, it's an everybody's-spending problem, because if government gets out of the insurance -- for example, if we push seniors and poor people into private insurance, cut Medicaid to the bone, and turn Medicare into a premium support program -- we won't have changed the price of health care. We'll just change who pays for it, how, and how much access they have to high-quality care.

Hamilton's right that Americans want an increasing government contribution to health care and would prefer to not pay for it. But really, they want health care that they can pay for -- through premia, out-of-pocket spending, taxes, whatever -- and if medical inflation doesn't stop growing faster than wages, revenue and GDP, Americans won't be able to afford it, no matter what share of national health spending comes from the government.

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