The Economic Realities Of A Gavin Newsom Governorship

Tuesday, October 16, 2018
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“Guaranteed health care for all. A ‘Marshall Plan’ for affordable housing. A master plan for aging with dignity. A middle-class workforce strategy. A cradle-to-college promise for the next generation. An all-hands approach to ending child poverty. Put California on a path for 100% renewable energy. Double down on the production of organic and sustainable food.” These are some of gubernatorial candidate Gavin Newsom’s proposals for California.

Affordable health care and housing, good jobs, investments in children and the elderly, and a cleaner environment are all important goals, and successful societies figure out ways to make progress on these goals.

So how do we make progress? Start by acknowledging three simple economic principles that underlie all successful government policy making:

  1. We can’t have it all—society faces tradeoffs.
  2. Everyone— including governments— responds to incentives.
  3. Expanding government does not just take more resources away from private use, it also depresses economic activity through higher taxes.

Any policy approach that doesn’t respect these principles will likely perform poorly. Newsom’s proposals are troublesome because they do not appear to acknowledge these principles. There is no explicit recognition of tradeoffs or scarcity, nor is there a recognition that these costly programs will depress the California economy by raising taxes. There is no indication that Californians need to prioritize government programs. Rather, Newsom presents a view that we can have it all. By ignoring the simple economics of policy making, Newsom’s agenda would be very costly and would damage California’s economy if it were to be implemented.

Newsom’s proposal for guaranteed healthcare, which almost certainly would be a single-payer system, would be very costly. Independent estimates indicate this would cost about $400 billion per year—roughly $10,000 per state resident. Note that the State’s entire annual budget is roughly half of this cost.

A single-payer proposal would require higher taxes. Some analysts estimate a 37 percent state sales tax would be required to fund such a program. This would depress the California economy and would lead many businesses and residents to leave the state. The cost of such a program is why Vermont (the home state of Senator Bernie Sanders, who has championed a single-payer system) considered a single-payer, universal coverage program, but ultimately dropped it. It is just too costly.

Viewing health-care policy from the perspective of standard economic principles means that increasing health care access requires confronting the cost of health care. Currently, the consumers and the providers of health care do not have enough of an incentive to contain costs. There are straightforward ways to enhance these incentives. Decouple health care from employment, and allow consumers to purchase health coverage on their own, including providing individuals the tax benefit that for decades has been given to employer-provided plans. This decoupling would have the additional, significant benefit of expanding portability of insurance plans.

With this decoupling, wages would rise, since employers would no longer be providing part of their workers’ compensation through health plans. Households could choose among competitive health plans, and consumers will be incentivized to use health care with much more of an eye towards cost, just as with the other goods and services they purchase. Among privately insured adults under age 65, nearly 60 percent of all health care spending is for elective outpatient care, and 60 percent of Medicaid spending is for this type of care. Even among the top one percent of health care spenders, 45 percent of their health spending is on outpatient spending. Outpatient services are the dominant component of health costs, and this spending will respond to incentives. And with cost-conscious consumers, health-care providers will also be more sensitive to costs.

For those wondering about the cost of single-payer systems in other countries, it is important to recognize that much of the allocation of health care under those systems is done by rationing. For example, suppose, an individual is planning to have a hip replacement. The median waiting time for this operation is 70 weeks in British Columbia. Rationing within single-payer programs does not lower the true cost of health care, which reflects not only how many dollars are spent but also patient welfare. While it is true that Canada spends less by performing comparatively fewer hip operations, Canadians are worse off because of this. It is not surprising that Canadians with the ability to pay come to the United States for some of their health care.

It is unlikely that a $400 billion health care program will be adopted in California. It is simply too costly. But there is a broader, more unpleasant implication here that should concern you about Newsom’s “we can have it all” approach. Reasonable government policy making takes into account how taxes depress economic activity and prioritizes how tax revenue is spent by evaluating the benefits and costs of competing public programs. Highly valued public goods and services are funded, and government agencies adopt cost containment programs to insure that highly valued goods and services are provided at a reasonable cost.

This sensible principle of state and local public finance has been slipping away from California for decades and may decline even more under a Newsom governorship. Society cannot escape the basic principles of economics. Scarcity. Tradeoffs. Incentives. Ignoring these principles in state and local policy making will significantly damage the state’s economy. This is the very real risk of a Newsom governorship.