Leonhardt on Health Reform and Innovation

I won’t say that backers of the Democratic health reform effort are getting desperate, but the arguments are getting increasingly entertaining. David Leonhardt, one of the best economics journalists around, has joined many of his colleagues in strongly promoting the effort, usually with his critical faculties intact. But the headline of his latest column — “If Health Care Reform Fails, America’s Innovation Gap Will Grow” — is a stretch.

In the cradle of American innovation, workers are making career choices based on co-payments, pre-existing conditions and other minutiae of health insurance. They are not necessarily making decisions based on what would be best for their careers and, in turn, for the American economy — that is, “where their skills match and where they can grow the most,” as another Silicon Valley entrepreneur, Cyriac Roeding, says. Health insurance, Mr. Roeding adds, “is distorting the decision-making.”

It is impossible to know how much economic damage these distortions are causing, but they clearly aren’t good. Economic research suggests that more than 1.5 million workers who would otherwise have switched jobs fail to do so every year because of fears about health insurance. Some of them would have moved to companies where they could have contributed more, and others would have started their own businesses.

This is a reasonable point, but it begs a few questions: (1) How is this a case for this particular set of reforms? One has to assume that any reform that increases the portability of health insurance or, better still, that severs the relationship between employment and insurance would do just as well.

Unless the government steps in to create a large pool of workers who can then buy insurance more cheaply, many small companies will go without it — and some workers will find themselves tethered to the safety of a big company.

Leonhardt knows that larger insurance pools aren’t the only answer, and that various other proposals, including health-status insurance, could achieve the same end of increasing portability. He dismisses the idea that reformers should start over.

And what if Congress — distracted by hot-button issues like drug imports, government-financed abortions and the so-called public option — produces something short of best? Should we then hope that it gives up and take another crack at health reform in, say, 2025?

It’s not obvious why Congress would wait until 2025. The more interesting question is, why should we settle for this proposal if, say, we are indifferent to the political prospects of incumbents in Congress and the White House? A public reinsurance plan aimed at the small-group and individual market could dramatically reduce the number of uninsured Americans at far lower cost. One can imagine a chastened Congress passing such legislation next year or the year after that. The only thing that changes if Congress fails to pass health reform legislation this year is that Democrats will face a somewhat tougher political year in 2010 and the next attempt to reform the U.S. health system will be more cost-conscious. I can see why Democratic strategists would consider this a grave disaster, but should the rest of us?  

Another point about innovation and fringe benefits. (2) While it’s certainly true that barriers to insurance portability create “job-lock,” and that workers make “career choices based on co-payments, pre-existing conditions and other minutiae of health insurance,” there are many other sources of job-lock that might prove even more nettlesome. In Europe, for example, labor mobility is blunted by linguistic diversity. The fact that 400 million Europeans don’t share a common language means that talented programmers in Latvia might have a hard time making it in Germany or Catalonia. Yet there are no plans, as far as I know, to impose a common language on the European Union to address this job-lock crisis. So one could argue that the United States, by virtue of widespread use of English among its 308 million residents, has an advantage that counterbalances the fragmentation of its health system. 

Workers also base career choices on wages, vacation time, work-life balance, commuting distances, “the vibe” of a particular workplace, access to desirable lunch spots, and much else besides. We could try to standardize these aspects of the work experience across firms in an effort to increase innovation, but it’s not obvious that this would be a very sensible strategy. 

If we really wanted to increase innovation, according to Leonhardt’s logic, perhaps we should introduce a large and generous universal basic income or demogrant, like that proposed by Senator George McGovern and, more recently, Charles Murray. Under this proposal, all Americans would receive several thousand dollars to cover the basic of necessities of life without any work requirements. We could choose to write poetry or surf all day rather than work, thus encouraging innovation in literature, the human sciences, and surfing techniques. This might actually be preferable to the welfare state as it currently exists — Murray makes a strong case in his excellent book In Our Hands – and it would certainly be a more comprehensive solution to the crisis of job-lock that Leonhardt describes. But I don’t see an active campaign for innovating-enhancing demogrants for reasons that remain obscure. 

Leonhardt writes,

Even before the financial crisis, the decade that will end later this month was on pace to have the slowest economic growth of any since before World War II. The No. 1 reason, I’d argue, was our innovation deficit.

This is interesting. Leonhardt doesn’t actually make the case for this “innovation deficit” as a source of slow job growth. One can imagine many other causes, including structural factors. The number of prime-age males in the workforce has declined over time, in part due to rising rates of incarceration, the presence of disability benefits, the high implicit marginal tax rates facing low-wage women and men, and much else besides. While innovation is very important, there are a number of strong work disincentives in our policy mix, including discrimination against secondary earners under Social Security, a topic I hope to address at greater length. While I agree that more job-creating innovation would be a good thing, invoking the slogan of “innovation” as a case for a muddled, impossible-to-implement health reform proposal strikes me as a dodge. 

For most of this decade, the rate at which companies eliminated jobs was actually lower than in the 1990s (despite the stories you sometimes hear about the United States having entered a new era of economic instability). The problem was that companies weren’t creating enough new jobs. The rate at which existing companies added jobs declined 14 percent from the end of the 1990s to 2007, according to the Labor Department. The rate at which start-up companies created jobs fell even more: 24 percent.

Again, Leonhardt hasn’t made a very strong case that job-lock is a bigger corporate than, say, the corporate income tax.

Given the consequences of the innovation deficit — slower growth, fewer jobs, lower living standards — you would want to look for every possible solution, wouldn’t you? 

Actually, no. I would want to look for cost-effective solutions that won’t actually exacerbate the problem. Wouldn’t you?

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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