How health care costs threaten the American economy

June 10, 2008

A major explanation for the dynamism of the US economy is the flexibility of the labor market. Compared with Europeans, Americans have historically been more willing to leave established employers to start their own companies or work for start-ups, and to move to other cities and states to find work. Companies also face fewer restrictions on hiring and firing. There’s no requirement for big severance payments in the US, for example.
Although it can mean more turmoil for individuals in the short-term the free-market approach generally promotes growth, prosperity and lower unemployment overall. It’s also part of the pursuit of happiness: individuals don’t find themselves chained to jobs they hate.

But the current situation in health care is undermining this advantage of the US economy and the US way of life. As today’s Wall Street Journal describes (Anxiety Over Health Insurance Shapes Life Choices) people are doing extreme things just for health insurance like getting married (or delaying divorce), restricting where they live, or working for companies where they’d rather not be. The article focuses on the insurance aspect of this: it’s generally easier and cheaper for people, especially those with pre-existing conditions, to get insurance through their employer rather than as individuals. But overall cost is also a problem. People get less bent out of shape about disparities in other expenses, because the overall amounts of money are generally lower.
As I’ve argued in the past (When socialism is good for capitalism), socialistic sounding policies such as Massachusetts’ guaranteed issue and community rating can actually encourage entrepreneurial activities by putting big companies, small companies and individuals on a roughly equal footing. It’s at least as significant as equal tax treatment of health insurance for companies and individuals. The downside is that such policies are often accompanied by a paternalistic element –namely lots of mandates– that drive costs up.

I don’t advocate nationalized health insurance, but I do think it’s at least as compatible with capitalism and the free market as our existing system.

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