During the weekend’s Democratic presidential debate, Hillary Clinton expressed skepticism about the cost of Bernie Sanders’s spending plans, particularly his $15 trillion single-payer health plan: “Free college, a single-payer system for health, and it’s been estimated we’re looking at 18 to $20 trillion, about a 40 percent increase in the federal budget.”
In response, Sanders argued that “it is unfair simply to say how much more the program will cost, without making sure that people know that we are doing away with cost of private insurance, and that the middle class will be paying substantially less for health care on the single-payer than on the Secretary’s Clinton proposal.”
Democratic presidential candidate Bernie Sanders answers a question at the Democratic presidential candidates debate at St. Anselm College in Manchester, New Hampshire December 19, 2015. REUTERS/Brian Snyder.
So Sanders’s argument is that, sure, single-payer will increase government spending and raise middle-class taxes (along with those on the rich), but a) healthcare costs will be lower and b) with companies no longer in the healthcare provision business, savings will be passed along to workers via bigger paychecks.
This is a variation of what I call the Cosmo Castorini Theory of Government Spending. In the 1987 rom-com Moonstruck — Cher won an Oscar for Best Actress — Vincent Gardenia play Cosmo Castorina, Cher’s plumbing contractor father. In one scene, Cosmo tries to explain to a yuppie couple why renovating their bathroom will be so pricey:
There are three kinds of pipe. There is what you have, which is garbage and you can see where that’s gotten you. Then there’s bronze, which is very good unless something goes wrong. And something always goes wrong. And then there’s copper, which is the only pipe I use. It costs money. It costs money because it saves money.
The Sanders plan costs the middle class money because — eventually — it supposedly saves them money. But there are some problems with the Sanders thesis:
1) The US doesn’t have a cost-growth problem, at least not compared to most other advanced economies. As I’ve written: “The US is more or less in line with the OECD average since 2008. And from 2003-2013, US spending was below the OECD average and about the same as single-payers the UK and Canada.”
2) Sanders assumes business will pass the savings on to workers. But as former Obama economist Austan Goolsbee notes in a blog post, that is exactly the opposite economic analysis Sanders and others use when calling for a repeal of Obamacare’s “Cadillac Tax” on pricey health plans. Goolsbee: “They fear that the Cadillac tax will lead companies to reduce or eliminate generous health care plans without raising employee’s wages in return.”
3) Goolsbee also points out that “people that currently pay less than 9% of their income on health insurance will be worse off under a plan with free health care but a 9% tax to pay for it.” That includes people such as the working poor and working twentysomethings who are still on their parents’s health plans.
4) Let me quote Goolsbee at length about what taxes and spending might look like in Sanders’s social democratic paradise (bold is mine):
Sanders’ plan would raise government spending more than $20 trillion over the next 10 years. It would take government expenditures as a share of GDP in the U.S. to levels equal to the big European social welfare states. Advanced countries with governments that size rely on heavy taxes on the middle class like big VAT/Sales taxes and high income tax rates that apply to large shares of their population.
Regardless of whether you think the plan to replace private health payments with a payroll tax+single-payer government program will end up hurting the middle class or not, it’s still going to be an increase in government spending. Replacing private spending with public spending raises the government share of the economy. An increase of $20 trillion over ten years ($15 trillion on health and $5+ trillion on other areas)–$2 trillion per year–would mean an increase in the government expenditure to GDP ratio for the US of around by something like 11.5 percentage points.To put that in perspective, the IMF numbers say that in 2014, U.S. government spending was around 36% of GDP. We have always been lower than the big social welfare economies of Europe. An increase in spending of the amount Sanders proposes would put us at 47.5%. That would actually put us, comfortably, in the range of the European countries, i.e., something quite different than anything in the U.S. historical experience.The thing is, however, every advanced country that has this kind of expansive role of government in the economy pays for it with substantially higher tax burdens on middle income people. Every one of the big welfare states in Europe, for example, has a VAT/Sales tax in the 20-25% range and has high income tax rates that apply to large segments of the population, not just the top. Ordinary workers in those countries bear a larger share of the government bill than we do in the US, not a smaller share. Could you turn the US into a Sweden-style social democracy without having the broadly based, high taxes they have in Sweden? Not really, no.
Sanders and his acolytes in the media .. argue that these costs are exaggerated. Why are they exaggerated? Because, they say, there is no new spending: The money he wants the government to spend is simply money that consumers are spending right now. When Sanders takes half of your paycheck, that’s totally fine: You were going to buy stuff with your money, and now he’s buying stuff! In the modern Democrat’s mind, that’s totally fine. After all, why would you need a choice from 23 underarm spray deodorants or 18 different types of sneakers if the Department of Health and Human Services can issue you a pair of Birkenstocks?
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