Could Wasteful Health Care 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!

Cochrane’s post is good throughout. Also see my piece in Forbes, “Can We Spend Our Way From Recession to Prosperity?

 

Comments (27)

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  1. Bruce says:

    Very clever application of radical Keynesian economics to health care.

  2. EJ says:

    We see it with military spending too. GDP was barely negative in Q4 even though most other economic fundamentals were strong (and bode well for future growth). The main factor holding GDP back was a big drop in military spending. This is the type of Keynesian economics that conservatives tend to support, see all the election-year caterwauling about how cuts to military spending would kill jobs.

  3. Tom H. says:

    Nice post.

  4. Larry says:

    Jobs with a purpose and not ‘make work’ jobs. Jobs that actually improve lives and well being. Jobs that solve some of the critical problems and challenges of our day.

    Oh but that would take some thought and planning to do something that makes a positive difference.

  5. Ramesh Chandra says:

    Obamacare is the biggest expenditure he took without a business/project analysis and with no budget approvals. Every member of congress who voted for it including O should be sued for malpractice. Chief Justice went out of his way saying the mandate is justified on the basis of taxation authority of congress. But he did not go deep enough to say that this was taxation without proper process. It is the utter failure of all 3 Govt branches in their Fiduciary responsibility of protecting US. Do we have any recourse other than throwing out the culprits. Of course for the chief justice it is only impeachment. And elections are too far away. Have we become a nation of in-computes?

  6. Robert A. Hall says:

    In the old days, they called it alchemy. Now it’s Keynesian Economics. Same scam.
    I will link to this from my Old Jarhead blog. (www.tartanmarine.blogspot.com)

    Robert A. Hall
    USMC 1964-68
    USMCR, 1977-83
    Massachusetts Senate, 1973-83
    Author: The Coming Collapse of the American Republic
    All royalties go to help wounded veterans
    For a free PDF of my 80-page book, write tartanmarine(at)gmail.com

  7. Ramesh Chandra says:

    Can congress pass a new resolution to throw out the federal exchange setup on the basis of costs and debt?
    Will they even try?

  8. Devon Herrick says:

    The argument that our health care spending has a stimulus effect is wrong-headed. Granted, medical spending has a stimulus effect on doctors pay, hospitals’ profit margin and provides jobs to the professionals that work in that industry. However, medical spending ultimately comes out of our household budgets. Spending on Medicare, Medicaid comes out of my taxes. Employer spending on my health plan lowers my take-home pay. As such, it displaces the new HDTV I could have bought. It reduces the size of home I can afford. Excess medical spending boosts my taxes and prevents me from taking vacations that are as long, or as far away, or as exotic as I otherwise could have taken. If left unchecked, medical expenditures will crowd out many other areas of our consumption and we will be less well-off for the trouble.

  9. Uwe Reinhardt says:

    There was a time, in the 1960s and 1970s, when economics professors tried to shock their students arguing that digging ditches and filling them in again could serve as a pump primer to get the economy out of the doldrums.

    But even then it was meant more as a smack with 2 x 4 to get our attention than a serious proposition. Our professor, Jim Tobin, always quickly added that there usually was enough useful stuff to do — e.g., infrastructure building or even extending log tables (in the 1930s) — that we could leave the useless ditches aside. There’s some delicious quotes on it out there that are fun to read.

    As EJ correctly points out, the only people who still tend to rely on that argument are conservative members of Congress or defense company lobbyist (see the discussion around the F-22).

    In health care we have both waste and unmet need side by side. So even there there’s useful stuff to do, although not all preventive care falls into that category. John is right on that one.

  10. TDP says:

    Trillions of private-sector dollars are sitting on the sidelines. If the government wanted to spark a recovery, it should focus on how to create an environment that would encourage investors to put that money to work. Taking money and wasting it on alien defenses doesn’t just waste those actual dollars, but also scares remaining private-sector dollars into deeper hiding.

    Waste is bad. Intentional waste is stupefyingly stupid.

    Suggested movie clip — ‘Fifth Element’, where bad-guy Zorg (Gary Oldman) endorses the ‘broken window’ (although he uses a drinking glass in his example)to prove that his evil and chaos actually creates a greater good.

  11. Uwe Reinhardt says:

    Devon is right if government stimulus spending is tax financed dollar for dollar, it could at most have a small stimulus effect (some positive effect because I might finance some of my added taxes out of savings).

    But Keynesian usually assume the added spending is deficit financed.

  12. Ron Bachman says:

    If government spending is so great, when will economist agree that letting me spend my own income is the best use of money? If i’m a small business wouldn’t it be nice to have some certainty around energy prices, taxes, interest rates, inflation, regulations, etc.? Maybe then I would spend my business dollars in anticipation of growing more customers rather than protecting against uncertain government interference.

  13. Linda Gorman says:

    Finally, the light dawns! The U.S. has a big economy because it has expensive health care. Countries like Britain have shrinking economies because they spend too little on health care.

    Therefore attempts to control health care spending with global budgets or caps are bad. So is ObamaCare, because it will reduce costs and health care spending if it works which, of course, is simply not in doubt.

    The progressive left’s mastery of cognitive dissonance is truly awe inspiring.

  14. Greg Scandlen says:

    Uwe,

    You write –“But Keynesian usually assume the added spending is deficit financed.”

    I would appreciate an economics lesson here (seriously). In what way is deficit spending not eventually “tax-financed dollar for dollar?” I understand the argument that today’s deficit dollar will be much smaller in the future due to growth, so easier to pay back. But are there not limits to that remedy? Is it not the case that to pay back $16 trillion in debt our children will have to run a $16 trillion surplus? What is the likelihood of that level of growth?

  15. Andrew O says:

    I do not have a PhD in economics, so I don’t want to comment to much on what is actually good or bad for economic stimilus. However, it would appear that nothing that is backed-up with a “trap” theory is good in the long-term.

  16. Al says:

    I hope someone keeps rocks and stones away from Krugman.

  17. Ron Bachman says:

    I think economic theories on the good impacts of wasteful government speading are evidence that there are “shovel ready” ideas out there. Let’s shovel that C&^%#P into the trashbin of progressive history.

  18. Angel says:

    Ron, while I am impartial to economi/political ideologies until I graduate from graduate school, I do not know if calling an ideologic and political movement as “C…P”…shows ideological arrogance. I can’t seem to deduce anything else from your comment. There is bad and bad people on both sides of the spectru — like it or not.

  19. Ramesh Chandra says:

    Spending to growth requires the calculation of a multiplier(with proper analysis).
    If you spend %50k on a job that produces zero, the only positive returns are taxes on the $50k(10k), movement of say the $40k in the economy, the costs of this movement.
    At best the multiplier is 40%.
    It further gets reduced by cost of the $50k u r spending.
    Will u run a business the ROR is minus 60%?
    As an economist(amateur) Krugman is opinionated statistical aggregator.
    Even then he never showed the multiplier , let alone justify his calculations for it.

    Let us take a different example:
    Let Keystone pipeline built.
    US spending on it is Zero(or negligable).
    Keystone fees get absorbed in the distribution costs.
    So what is the multiplier to get this gas to the refineries?
    In addition to a few construction jobs, what is the increase in refinary jobs?
    What is the increase in tax revenue?
    What is the incremental business for refineries?
    What is the effect on us debt?
    If there ought to be remedial environmental actions are to be taken, r n’t these permanant improvements.
    If the tri-state area digs up 7.5 trillion barrels of shale oil, and you build a brand new city around the dug areas, with all sort of protections, won';t that be a city that adds to the national assets?
    Won’t that provide a large number people , business and taxes?
    When r we going to take these issues on a Project analysis and management perspective?
    I am a believer in ure Math., not biased statistical aggregation.
    Proper calculation of a Multiplier is more valid than aggregating on insufficient data.
    It is time economists learn accounting.

  20. Ramesh Chandra says:

    Angel: What is “C…P”.
    As per ideological arrogance, is it not really purity of thought.
    Not every ideology is worth its salt.

  21. Uwe Reinhardt says:

    Greg, good question. The assumption is that once the pump has been primed through deficit financed spending, economic growth will resume and, ideally, the debt can be repaid even without raising taxes

    Reagan’s deficit financed tax cuts and Bush’s were justified that way, even in the Wall Street Journal, I recall. Ditto for The Dems who defend not ax cuts but government spending that way.

    I recall that when I was a graduate student at Yale, our professor TObin wrote a paper entitled “Deficit, deficit, who’s got the deficit.” At the time economists were worried that the deficits were too small, not producing the supply of low risk government debt portfolio managers wanted in their diversified portfolios. You may recall that portfolio theory always included risk free debt as an anchor.

    When the deficit shrank and became a surplus under the Clinton administration and federal debt started to get reduced, Alan Greenspan voiced the same worries. Perhaps President Bush just wanted to kindly supply new public debt for mutual funds and pension funds to hold.

    So, running e country Sioux any public debt would not be viewed as good by economists — perhaps even the Great One — and by the Street. The issue is the optimal size of the debt. There is no question that it is now too high, even when Bush left office, when it stood at $10 trillion, up from $5.6 trillion when he took over from Clinton. And Bush’s last budget, submitted in Sept 08 for fiscal 09 had a deficit of $1.3 trillion in it.

    So this is all a complicated matter , much misused in the bipartisan fights we are having.

  22. Ramesh Chandra says:

    UWE: “This is all a complicated matter”.
    Sorry, no, it is not.Not if u start with basics.
    First, Govt. doing only the things it is basically responsible for.
    Start with no hanging debt , no hanging deficit.
    Then c what the citizenry can do.
    Start with no cost or low cost projects.
    Calculate the multiplier.
    See what current assets(oil reserves, tech), can be used to support these projects.
    Build a rainy day fund, like the states are doing.
    use these funds , if need be, as long as the outcome has a multiplier over 1, but more close to 2.

    This is what a lean business follows.
    Why not the Govt.?

    What is so complicated about it?

  23. Ramesh Chandra says:

    k. u may say we already have a mess.
    Start by cutting $100b/yr in the Govt. waste.
    Generate $300b in new fees and Royalties.
    Then pass a balanced budget proposal effective 2023.
    Spend loose change on converting state unemploymentusi offices into employment offices.
    don’t spend it on community colleges.
    Spend people to come up with closing skill gap in 3 months, not 3 years.
    That will generate 3m jobs and 30b in new revenues.
    With a multiplier of 3 that will be almost another $100b.
    Accelerate research and new projects like space mining
    using Lean Startup techniques.
    Eliminate waste by emphasizing individual and business choices.
    Unleash projects for efficient processes.
    Simplify tax code and reduce IRS and tax experts.
    Technology is not the villian.
    It is the saviour.
    Instead why r we wasting discussing topics which don’t take us any where.
    By the by change the Senate from Gentleman’s club to 100 real leaders.

  24. H. James Prince says:

    Mr. Chandra,
    While I agree with a great deal of your points, I feel that their potency is diluted by poor grammar. As Tolkien writes – “never say anything unless it is worth taking a long time to say.”

  25. Ramesh Chandra says:

    James: I really appreciate ur feedback.
    I end up writing quickly and not pay enough attention to spelling or grammar.
    At least I can spell check.
    I need to take a little bit more time to improve grimmer.
    I do like TEXT spelling though.

  26. Ramesh Chandra says:

    I want add one more important comment.
    We started using LEAN strategies in industry and business.
    They are very applicable in Govt.
    Here are some applications.
    We have Contract Officers,COTRs, Program Managers, and Project Managers.
    We just need two classifications.
    Contract Officers(legally required as Warrant holders) and Project Managers.
    We have Initiatives, Programs and Projects. We try to do multi-year projects by cloaking them as Initiatives and Programs. Then we have Planning departments whoom Implementors look at Esoteric and ignore them.
    But Planners are responsible for the initiative.
    This results in a huge disconnect.
    Congress needs to learn to tailor Programs into chunk-ed down to annual projects.
    Contract Officers need to understand the aims of these projects and connections between projects.
    This takes away the need for COs to distribute the allocation of funds.
    Please simplify their jobs.

    This is one of many workable solutions to make Govt. effective.
    I am no expert Lean solutions. I am sure the experts can make wonders happen in Govt.
    This is what I meant by using Technology.
    This technology is not Rocket science.

  27. abby says:

    Love it!
    To the point, articulate and very interesting,
    Thanks