Liberating the economy’s new commanding heights

Paul Howard Contributor
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For conservatives, health care and education aren’t “sexy” policy issues, at least compared to defense and taxes. But Arnold Kling and Nick Schulz argue persuasively in the current issue of National Affairs that conservatives need to immerse themselves in the details of health care and education spending if they want to control the future growth of government.

They start with a simple observation: If you want to know what the “commanding heights” of the U.S. economy are today, take a look at consumer spending. By this measure, education and health care are “our foremost growth sectors — the ones most central to employment and consumption.” They are also most subject to government intervention and planning — both on the demand side (through enormous tax expenditures that encourage consumption) and the supply side (through extensive state and federal regulations that limit competition).

Kling and Schulz note that health care alone produced 25% of new jobs over the last two decades. Government was second, with 15% of new jobs, nearly three-quarters of which were in education. Over the last 10 years, government, education and health care jobs increased by 16%, while employment outside these sectors decreased.

Increased health and education spending isn’t inherently bad. The problem is that it is extraordinarily difficult to measure productivity in health care and education, and both sectors have been highly resistant to technology-driven efficiency gains that have transformed almost every other sector of the economy.

This is because education and health care involve individual judgment and decision-making that “are not as easily handed over to machines or outsourced to low-skilled workers abroad.” As a result, not only are firms in the health and education sectors less efficient, it’s difficult even to measure their efficiency.

Data suggest that both sectors suffer from massive efficiency problems. Studies from RAND and Dartmouth suggest that much of U.S. medical spending does not result in improved patient health. As for education, the U.S. spends 40% more per student than other OECD countries but ranks far below the average in reading, science and math skills.

Government policy both encourages consumer spending in health and education and protects providers in those industries through licensing requirements that reduce competition from lower-cost or higher-quality providers (charter schools, retail clinics, etc.).

And since the stakeholders — hospitals, nursing homes and teachers’ unions — in these sectors are critically dependent on government protection for their survival, they are also powerfully motivated to fight off market-oriented reforms.

What to do about it? Kling and Schulz don’t spend much time talking about reforms, other than to advocate for more market-based options and paring back licensing requirements that would encourage “on-the-job learning” in lieu of expensive diplomas.

Still, it’s possible to draw two main lessons from their article.

Structural reforms are more important (in the long run) than revenues. Recent debt-reduction fights in Congress have focused on Tea Party efforts to reduce government spending. But as long as existing tax and regulatory policies drive spending towards health and education, it will be difficult, if not impossible, to limit government control over the economy. Reducing tax breaks for employer-provided health insurance or embracing reforms (like Lieberman-Coburn) that inject smarter cost-sharing into Medicare is thus a double win for conservatives: They would reduce entitlement spending and encourage seniors to seek out more efficient providers. Offering liberals increased tax revenues is a small price to pay for structural entitlement reforms that liberate market forces.

Develop a coherent state-by-state strategy. State budget crises, due to rising pension and health care costs, present an inviting opportunity for rapid market reforms in education and health care. In 2006, for instance, Indiana Governor Mitch Daniels created a health savings account option for state employees that now covers 70% of state workers and saves the state about $20 million every year. My Manhattan Institute colleague Josh Barro suggests that if these reforms were expanded to all public employees, states could save $20 billion annually.

In Texas, Governor Rick Perry is leading the charge to create a $10,000 college degree — reducing state tuition costs by over $16,000 per student. The degree would be based on online course offerings and would promote outside mentoring. Focusing on affordable, skills-based learning would benefit non-traditional students who can’t afford — or don’t want — the obligations and costs that come with being a full-time, on-campus student.

In health care, governors could also create “enterprise zones” that free up providers from regulations that inhibit competition in return for transparency on costs and outcomes. Rather than regulate who does what, states should reward innovative providers that produce better outcomes at lower cost.

Liberating the commanding heights of the economy will be a long, difficult process because of the myriad entrenched interests that stand to lose from reforms. But conservatives should rally support from moderates and liberals by pointing out how our existing health and education arrangements trap the poor in dysfunctional public schools, drive up college costs for the middle class and reduce the competitiveness of American workers in the global economy.

Conservative heroes have always tended to look more like Tom Clancy’s Jack Ryan than Wisconsin’s Paul Ryan. Kling and Schulz will have done a tremendous service if they encourage more conservatives to emulate the Badger State policy wonk and his relentless focus on the details of entitlement reform.

Paul Howard, Ph.D. is a Manhattan Institute senior fellow an director of the Manhattan Institute’s Center for Medical Progress. He is also the managing editor of Medical Progress Today.