Elizabeth Warren claims she can pay for her 10-year, $52 trillion health care plan without increasing taxes on the middle class. But both she and her critics are approaching the question wrong. What really matters is the opportunity cost of policy choices, in terms of foregone goods and services — not whether the money can be raised to pay for a chosen policy.
Consider this point in the context of Warren’s plan, which includes a complex series of health care savings and higher taxes on the wealthy.
One way of financing the plan is to pay doctors in hospitals lower fees (part of “saving” $2.3 trillion). There will then be fewer profitable hospitals, and fewer doctors working fewer hours, because some of them might retire earlier than they otherwise would. Fewer hospitals means they will likely increase their monopolistic tendencies, to the detriment of patients. A related plan to pay hospitals less is supposed to save another $600 billion.
The practical impact of these changes will be to deprive health care consumers, including middle-class consumers, of goods and services. The larger point is that real cost of any economic arrangement is not its nominal sticker price, but rather the consequences of who ends up not getting what.
Another part of the plan is to pay lower prices — 70% lower — for branded prescription drugs. That is supposed to save about $1.7 trillion, but again focus on which opportunities are lost. Lower drug prices will mean fewer new drugs are developed. There is good evidence that pharmaceuticals are among the most cost-effective ways of saving human lives, so the resulting higher mortality and illness might be especially severe.
Of course, many critics of the pharmaceutical industry downplay its role in the drug-discovery process. Regardless of the merits of those arguments, they do not show that a 70% cut in prices will leave supplies, or research and development, unchanged.
Another unstated cost of the Warren plan concerns current health insurance customers: Many of them prefer their current private coverage to “Medicare for All.” Switching them into Medicare for All is an opportunity cost not covered by Warren’s $52 trillion estimate. Even if you believe that Medicare for All will be cheaper in monetary terms, tens of millions of Americans seem to prefer their current arrangements.
Warren also proposes higher taxes on corporations, capital gains, stock trades and the wealthy, as well as stronger tax enforcement — all of which is supposed to raise more than $10 trillion. Again, regardless of your position on those policies, they will diminish investment and (to some extent) consumption among the wealthy. You might not worry much about the consumption of the wealthy. But the decline in investment will lead to lower wages, less job creation and fewer goods and services. These are all opportunity costs, for both the middle class and just about everyone else.
Supposedly $400 billion will be picked up from taxes on new immigrants, following the passage of a law legalizing millions now in the country illegally. I favor such legislation. Still, I don’t necessarily see this as a windfall. Yes, more immigrant labor will produce more goods and services. Tax revenue from this new productivity could be used in any number of ways, with universal health care coverage just one option of many.
You might think that universal health insurance coverage is clearly the highest priority, but is it? America’s health care sector is relatively costly and inefficient, and even major health care legislation does not much improve health outcomes. What about investing in green energy or climate change alleviation? Private-sector job creation? Public health measures outside of the health insurance system, such as fighting air pollution or lead? Checking California forest fires?
Even if you think health care is a human right, there are alternative policies that will benefit human health. They cannot all be carried out, at least not very well.
I don’t mean to pick on Warren. Virtually all politicians, of both parties, fall prey to similar fallacies when presenting the costs of their policies. Warren’s proposals, when all is said and done, are best viewed not as a way of paying for her program but as a series of admissions about just how expensive it would be. Whether or not you call those taxes, they are very real burdens — and many of them will end up falling on the middle class.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “Big Business: A Love Letter to an American Anti-Hero.”