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Health Care as Stimulus: The Best Way to Spend Big Bucks

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Dean Baker
The Guardian Unlimited, November 17, 2008

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The Great Depression was an economic catastrophe that subjected much of the country to poverty and insecurity for more than a decade. But this catastrophe provided the political backdrop for enormous political change, including the national minimum wage, the 40-hour work week, full legalization of labor unions, and Social Security.

The current economic crisis provides the same sort of opportunity. We are likely to see a higher minimum wage. It is possible that an Obama administration will bring the United States in line with the rest of the world by guaranteeing workers some amount of paid sick leave and/or vacation days. It is also possible that it will act to protect workers' right to organize by pushing through the Employee Free Choice Act.

But the really big follow-on to Social Security, national health care insurance, is an item that should sit at the very top of President Obama's agenda. The reason is that we need to pass a stimulus package right away, and health care should be a very big part of this package.

The need for large-scale stimulus is recognized by economists across the political spectrum. The housing sector has collapsed and will not be revived soon. The bubble in commercial real estate is also now collapsing, placing a further drag on the economy. Most importantly, consumer spending is crashing in response to the loss of more than $5 trillion in housing bubble wealth in addition to the loss of a comparable amount of wealth in the stock market. The drop in annual consumption spending is likely to be in the range of $300 billion to $400 billion.

A boost from the government is the only plausible way to replace this collapse in spending. Most economists place the size of the necessary boost in the range of $300 billion to $450 billion annually. Paul Krugman has argued that $600 billion is a more appropriate target. Given the recent rise in the dollar, which will kill export growth, this higher figure is almost certainly a better target.

The problem is that it is not easy for the government to find ways to usefully spend this much money. There are obvious ways in which the government can get money to help alleviate the impact of the downturn and increase spending such as extending unemployment insurance benefits and increasing food stamps. But additional spending in these areas will not likely exceed $30 billion.

It can probably spend another $60 billion a year on infrastructure projects, perhaps $50 billion aiding hard-hit state and local governments, and maybe $40 billion on green investment projects. This sums to $180 billion, a figure well short of even the $300-$450 billion stimulus range.

This is where health care comes in. Health care is a $2.4 trillion sector. It can reasonably be expanded by 5-10 percent in a relatively short period of time, which would imply an additional $120 billion to $240 billion in annual spending. The jobs created in this sector would provide a substantial boost to the economy.

More importantly, we could substantially extend coverage through a stimulus package, getting much closer to the goal of universal health care system. The quickest way to get there would be with a tax credit for employers who cover currently uninsured workers. Employers who already cover their workers can get a credit for increasing the generosity of their coverage. Generous credits should be sufficient to extent coverage to most uncovered workers.

At the same time, the government could open up the Medicare system, allowing all employers and individuals to buy into a Medicare-type plan that would compete with private insurers. This step, together with rules that limit abuses by private insurers, would be important in setting up a system that allows for cost containment over the long-run.

After two years the credits could be phased down to the earnings-based subsidies advocated by President Obama during his campaign. In the longer-term, steps could also be taken to fill the gaps to ensure that people still left behind get covered.

The downturn has given President Obama the opportunity to quickly accomplish one of the most important goals he set himself during the campaign. One of the biggest problems in getting to universal coverage was finding the money to extend care before reforms could actually rein in costs.

The recession brought on by the collapse of the housing bubble has created a situation in which the main priority for the moment is spending money, not saving it. There is no better way for us to spend large amounts right now then getting our health care system in order. President Obama should seize this extraordinary opportunity.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.