Deficit Spending and Health Care

Andrew Sullivan posted an interesting City Journal piece by Jim Manzi yesterday concerning the stimulus package, taxes and its effect on innovation in the private sector. As many conservatives of his stripe have argued, Manzi postulates that the “expectation of large future tax increases” stemming from “all this spending with the national credit card” will discourage venture capitalists from taking risks and seeking credit lines to fund new businesses. As he tends do to, Manzi applies the logic of mathematical probabilities to his analysis:

“If entrepreneurs had a higher success rate, then many more people would start companies…But when you multiply the potential payoff by the low odds of success, the expected profit doesn’t look so compelling. The pot of gold has to be big indeed to get people to make such a risky leap. Today, we’re increasing the deficit as a percentage of GDP to levels not seen since World War II. Any prospective entrepreneur must realistically expect higher future tax rates or increased inflation (or both), which will substantially reduce the future payout from a successful start-up company. The pot of gold has suddenly gotten a lot smaller.”

There’s a lot to be said for this argument. Unless you have some kind of weird infatuation for that total dream boat managing Obama’s budget, I think we can assume taxes for most people will nominally increase in the coming years. Even within the framework of Orszag’s rosy assumptions—which foresees the US economy growing by 3.2% in 2010, 4% in 2011 and 4.2% in 2012—the Obama administration still predicts a $533 billion shortfall by the end of his four years and $1.75 trillion by the end of 2009. There is little doubt that prospects of a massive deficit are already sending shock waves through the markets; just look at the bond markets’ behavior of late.

 

Ultimately, though, I think Manzi approaches the stimulus issue within an economic vacuum. Within a post-Obama America, he worries that “government-dominated economic era may not be an auspicious one in which to start companies that threaten big, incumbent corporations with lots of political clout.” In other words, large government intervention will only burden small businesses and increase their costs.

 

Well…what about employee health care?

 

Premiums for employee benefits, on average rose by 10.5% percent in the last two years. The Kaiser Family foundation estimated that costs for business-run health care has been increasing four times faster, on average, than workers’ salaries ten years ago. Even without a federal plan, national spending on health care is expected to reach $4.3 trillion by 2016, or 20% of the GDP by 2017.

 

I could go on, but the facts are undeniable: if we apply Manzi’s principle of small business estimations and federal spending projections, the cost of allowing the free market to work clearly outweighs the dragging effects of deficit spending aimed at reigning in health care premiums. In other words, effective government action could prevent an even larger budget crisis and provide a better business environment for the private sector.

 

I think if Manzi were over my shoulder reading this, he’d likely note that he does not oppose a government health care strategy inherently—he simply has misgivings about the deficit’s effect on innovation. But the point remains: Manzi seems unaware of any heavy cost burdens the private sector places on itself, as if government spending ruins the free market’s otherwise uninterrupted trajectory towards efficiency and lower costs.

 

With respect to health care, I think Conservatives must accept that we have entered an era in which Friedman and Reagan’s contributions have stalled. I find the idea of higher taxes as distasteful as anyone, but it’s become abundantly clear that inaction and lower taxes—the only alternative Cantor and company seem to be offering— is untenable with respect to small business.

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2 Responses to “Deficit Spending and Health Care”

  1. Jim Manzi Says:

    Thanks for the thoughtful comments (and I guess I am reading it over your shoulder).

    I do get the point that all of this needs to be seen in context. You provide a good example of the general line of argument that “yes, you will project higher taxes, but on the other hand, you should project higher odds of success and higher pre-tax total payout if successful, because the economy will be functioning far better than it would have in the absence of these increased taxes”. Obviously, I think it’s also possible that one might hold the view that the various changes that are bundled in with these tax increases will, in addtion to the tax effects, make the economy less productive, and therefore make the expected payout yet worse.

    In the article, I was only trying to make the point that what we see as taxes on the rich are also taxes that will, all else equal, disocurage people form making efforts to become rich.

    Best,
    Jim

  2. On Balance « Yes, Let’s Talk About This Says:

    […] Posted in Uncategorized by Jon on March 6th, 2009 Henry has a good post on how the need for health care reform overshadows the need to reign in long term deficit […]


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