Economics

Could Wasteful Healthcare Spending Be Good for the Economy?

Suppose I throw a rock through a store owner’s window. You admonish me for this act of vandalism. But I reply that I have actually done a good deed.

The store owner will now have to employ someone to haul the broken glass away and someone else, perhaps, to clean up afterward. Then, the order of a new glass pane will create work and wages for the glassmaker. Plus, someone will have to install it. In short, my act of vandalism created jobs and income for others.

The French economist, Frédéric Bastiat called this type of reasoning the “fallacy of the broken window.” All the resources employed to remove the broken glass and install a new pane, he said, could have been employed to produce something else. Now they will not be. So society is not better off from my act of vandalism. It is worse off — by one pane of glass.

But there is a new type of Keynesian (to be distinguished from Keynes himself) that rejects the economist’s answer. Wasteful spending can actually be good, they argue. If so, they will love what happens in health care.

By some estimates one of every three dollars spent on health care is unnecessary and therefore wasteful. ObamaCare’s “wellness exams” for Medicare enrollees — so touted during the last election — is an example. Millions of taxpayer dollars will be spent on this service, yet there is no known medical benefit. Similarly, ObamaCare is encouraging all manner of preventive care — by requiring no deductibles or copayments — which is not cost effective.

Yet all this wasteful spending could actually help the economic recovery according to the resurrection of an old Keynesian idea called the “liquidity trap.” Here is New York Times columnist, Paul Krugman:

As some of us keep trying to point out, the United States is in a liquidity trap: […] This puts us in a world of topsy-turvy, in which many of the usual rules of economics cease to hold. Thrift leads to lower investment; wage cuts reduce employment; even higher productivity can be a bad thing. And the broken window fallacy ceases to be a fallacy: something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment.

John Cochrane provides further explanation:

“Fiscal stimulus” is the prediction that even completely wasted government spending is good for the economy. Paul Krugman recommended, with refreshing clarity, that the U.S. government fake an alien invasion so we could spend trillions of dollars building useless defenses. (I’m not exactly sure why he does not call for real defense spending. After all, if building aircraft carriers saved the economy in 1941, and defenses against imaginary aliens would save the economy in 2013, it’s not clear why real aircraft carriers have the opposite effect. But I’m still working on the nuances of new-Keynesianism, so I’ll let him explain the difference. I’m not a big fan of huge defense spending anyway.)

According to new Keynesianism, we are in a liquidity trap when nominal interest rates hit zero. At that point, according to the theory, hurricanes and earthquakes are good for the economy. So are sudden increases in the price of oil.

A new paper by Johnnes Wieland, tests some of these predictions. As summarized by Cochrane:

Johannes looks at the earthquake in Japan, and oil price shocks. Surprise, surprise, earthquakes are bad for output…[and] he finds that oil shocks have worse negative effects on employment at the zero bound than in normal times!

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis. He is also the Kellye Wright Fellow in health care. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.

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Joseph Tannuzzo, BSN RN CEN TCRNbob hertzBobbyGPeter1Craig "Quack" Vickstrom, M.D. Recent comment authors
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Joseph Tannuzzo, BSN RN CEN TCRN
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Joseph Tannuzzo, BSN RN CEN TCRN

Wasteful healthcare spending could be good for the economy but is terrible for society. Car accident victims are a good example of this. If a victim of a motor vehicle comes into the ER and requires life saving procedures, it will require a great deal of resources and skilled providers such as surgeons and other specialist. The victim may not fully recover and will have to spend years out of work and in rehab. Preventative medicine can never produce the dramatic visible results that a surgeon can show by saving the life of a car accident victim. But implementing policies,… Read more »

Peter1
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Peter1

“American payors have given themselves no weapons.”

We have been disarmed by the medical/industrial/political complex.

John Ballard
Guest

**Like**

(And no “Second Amendment” financial protection for consumers, unfortunately.)

bob hertz
Guest

Both public and private insurance plans leave a great deal of room for “upcoding”. This means higher bills and higher claims, even when the number of persons insured does not grow at all. For example, Medicare in 2000 paid for 13 million hospital admissions and the cost to Part A was just under $100 billion. In 2010, Medicare Part A paid for 13 million hospital admissions and the cost was over $180 billion. Hospitals learned to admit more patients into intensive care, and to maximize reimbursements based on the diagnostic code (DRG’s). Countries have binding national fee schedules have learned… Read more »

bob hertz
Guest

Margalit, you are correct that it is cruel and crazy to make the individual patient into a kind of kamikaze of cost control. No other industrial nation would consider asking its population to refuse care and, effectively, suffer and die, so as to challenge high medical bills. This is just cowardice, as opposed to doctors and hospitals which post unconscionable bills. Bob Hertz The Health Care Crusade John, the maddening thing to me about group insurance to me is that the carriers do exert price restraint. And yet premiums go up every year. This is mainly due to an actuarial… Read more »

John Ballard
Guest

Insurance premiums go up simply because the bills go up. And those bills originate with providers. All the “downward pressure” in the world isn’t going to get results as long as premiums are tax-advantaged and employer contributions are deductible business expenses. Tax policy and GAAP have the effect of sheltering medical bills from close scrutiny. And in most settings there is no real competition. I don’t know about other places but where I live competing systems cannot be built without prior approval requiring a CON (certificate of need), a politically generated official document with a totally misleading name. Certificates of… Read more »

Margalit Gur-Arie
Guest

Let me ask both of you a quick question. I just took my dog to the vet last week and he got a couple of shots and a well-dog exam (or whatever they call it). It was $250. I paid and left and then I got thinking. I’ve had dogs and cats all my life. I never shopped around for a cheap vet, but did shop around for the best vet, particularly when I had one dog with a life threatening disease. I never asked how much things are going to cost in advance, but I remember the emergency clinic… Read more »

Peter1
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Peter1

These are good points Margalit. Most vets are paid with cash yet none (I’ve seen) advertise or post prices. There is no outward price transparency in the vet business, in fact I’ve never had a vet offer costs estimates for treatment even when the pet may require extensive surgery/treatment. I had one vet say that if she brought up price the owner may decline treatment. Only having several pets do people get an idea of possible costs.

My personal observation is that you spend $500 then the pet dies anyway.

John Ballard
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Margalit, for my answer to your question about pet care I refer you to my comment above pointing to the difference between investments and expenditures. There is a qualitative difference. that makes them different from person to person depending on their social and wealth status. One person’s investment is another person’s expenditure. In short, pets and pet care are expenses, not investments. Take horses, for example. I’m not in that league, but if I were I would regard my horse as an expense, not an investment. But for some people with far more wealth than I (Would it be tacky… Read more »

Peter1
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Peter1

Pets can be an investment in personal well being. Some will argue that people who keep and love their pets experience better health.

Would putting granny on DNR be a way to cut expenses while spending a million dollars on a child’s health care be an investment?

Margalit Gur-Arie
Guest

For some of us spending money on a dog’s health is in the same category as spending money on one’s own health or the health of one’s other family members. I don’t know if these are investments or expenses, since, as Peter writes, not all health spending has tangible returns to the one that spends the money. Children’s future earnings are rarely a consideration for a parent spending that million dollars on a sick kid.

Point is that in health care for human or non-human family members, pricing cannot be driven by the consumer.

bob hertz
Guest

Good points, John, but I want to explore your statement that using tax money for health care leaves no motivation to drive prices down. Canada, Germany, Japan, France, and Sweden all use mainly tax money for health care, and they are driving prices down all the time. The maximum allowable price for an MRI in Japan is $98. That is because they have real budgets for health care, not ‘mandatory spending.’ Legislators are often forced to make real choices between more money for health care vs other social programs. In America, Medicare and Medicaid actually do exert price controls —… Read more »

John Ballard
Guest

bob, my understanding of the system was informed by Paul Starr’s Social Transformation of American Medicine, somewhat dry and academic, but the gold standard for anyone wanting to know about the subject, and Maggie Mahar’s Money Driven Medicine. If I recall correctly, right after the war the first of the group insurance products came along in the form of the original Blue Cross. It was for hospital care only and was an attractive company benefit aimed at attracting good people from other companies that may not have had it. The doctors, aka AMA, were absolutely opposed to the idea, suspicious… Read more »

bob hertz
Guest

I have delved into this issue many times during my health care research of the last 20 years, Here are a few comments. 1. A billion dollars spent on Medicare seems to produce more jobs in the USA than a billion dollars returned to taxpayers. Medicare results in the hiring of nurses, technicians, etc in the USA. Taxpayers might buy foreign products, or, if they are wealthy, take trips to Europe, China, Israel, etc. 2. Many families have stayed in the middle class because the wife got a good nursing job, even if the husband was laid off at the… Read more »

Peter1
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Peter1

Bob, substitute Medicare/Healthcare with Defense and could/would you make the same justifications for the spending?

John Ballard
Guest

Since you asked, I have two observations. One has to do with the source of the money being spent, the other with unintended consequences. By definition all government spending is either tax money or funds borrowed by taxpayers (bonds) which must be repaid, typically with interest. Next time you come across someone complaining about “redistribution of wealth” remember that taxes, tax policy and any rules policing the economy result in redistribution of some kind. I don’t object to that type of redistribution, by the way. That is why we have taxes and government spending. And when jobs are created in… Read more »

Craig "Quack" Vickstrom, M.D.
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Craig "Quack" Vickstrom, M.D.

Waste is waste. It is never good.

Peter1
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Peter1

Depends what end of it you’re on.

BobbyG
Guest

Exactly.

“Could Wasteful Healthcare Spending Be Good for the Economy?”

Some parts of it. Even in a zero- or negative sum game there are nominal “winners” — for a time.

BobbyG
Guest

As predictable misrepresentation of Keynes as we might well expect. More broadly, this article is a waste of space.

steve
Guest
steve

John- Did you ever actually read Keynes? I think the term Keynesian has become meaningless and just used as a pejorative.

Steve

Ravi budhwar
Guest

No A wasteful spending in healthcare will not be good for economy as if your are not spending in right areas than how could your expect some better results.

john
Editor

sigh – John

If we were on t.v. I’d beat my head against the studio desk

thunk thunk thunk

“there is no evidence that preventative care has a medical impact”

is there any evidence that defense spending saves lives by preventing war?

any evidence that state department spending prevents conflict?

any evidence that locking up serial killers prevents criminal activity?

I need studies

what? you don’t have any?

Margalit Gur-Arie
Guest

Could have, would have, but the window fixers are not employed to produce something else, because the shopkeepers choose to sit on large piles of cash and do nothing.
If I am not mistaken, the correct link to Mr. Krugman’s article is suggesting investment in the environment, where every possible window has been already wantonly broken by the righteous shopkeepers.

John Ballard
Guest

You want spending? You got it. The footprint of most health care systems in America is often as big as an industrial park. There are so many clinics, labs, private practices, specialty centers, agencies, imaging centers, retail outlets selling durable equipment and disposables, pharmacies, the list is endless… And that doesn’t take in to account the ancillary non-medical businesses from window-cleaning, landscaping and waste removal to uniform sales, food service outlets and parking garages. It takes your breath away to think of it. And every dollar supporting this is in one way or another the cost of health care in… Read more »