MI senior fellow Chris Pope joins Brian Anderson to discuss the surprising generosity of the U.S. welfare state, why health care costs so much in America, and the prospects for the Biden administration’s policy agenda.
Brian Anderson: Welcome back to the 10 Blocks Podcast. This is Brian Anderson, the editor of City Journal. Joining me on today's show is Chris Pope. He's a senior fellow at the Manhattan Institute, a political scientist, and an expert on healthcare policy. His recent writing for City Journal punctures myths about the American welfare state by bringing a comparative perspective to the issue. So, Chris, thanks very much for coming on the show.
Chris Pope: Thanks, Brian. Good to speak with you.
Brian Anderson: So let's start with one of the more striking observations that you made in a recent piece for us. A recent study published by the World Inequality Lab at the Paris School of Economics observed that the US stands out as the country that redistributes the greatest fraction of national income to the bottom 50%. Now this flies against everything we're typically hearing about the American welfare state, which is supposed to be so stingy. So what is up with that?
Chris Pope: So I think the best way to understand that observation is that it's stingy in so far as we're very careful who we give benefits to. But when you actually get benefits, if you're disabled, if you're unemployed, if you're a single mother, the actual benefit levels are comparable to the levels you might see in Europe. What we do do is we make very sure that people who get benefits aren't able to work, which is generally the case in disability. We kind of do probably more verification than other nations do. In the case of unemployment, we limit the duration of benefits so that they're not indefinite. And for pensions, which is probably the most expensive of all these benefits in terms of fiscally, we replace a smaller share of rich people's incomes. These benefit programs are really more of a safety net than an all-encompassing retirement provision, which they often are in Europe.
So the big difference isn't necessarily on the benefit side in terms of generosity. It is the flip side of that, which is the taxes to pay for them. We have pretty much the same level of taxes on the rich as Europe does in terms of a share of their income. The richest 10 percent pay about a third. But we have much, much lower taxes on lower income people. We have much lower payroll taxes, and we don't have a value-added tax. So the taxes paid by the poorest half of the population are about half what they are in Europe.
So the net effect, really, is that we are much more favorable to people at the bottom end of the income spectrum.
Brian Anderson: Concerning public pension plans, Europe spends a lot on them, and it accounts for a significant percentage, I think, of the difference in government cost. What is that looking like given the demographic shifts in Europe, where you do have a pretty rapidly aging population? Won't developed world economies' outstanding pension liabilities, isn't this at some point leading to a pretty tough choice between reducing the benefits that have been promised and then taking away money from working-age people?
Chris Pope: Yeah. I feel like pensions is one of these topics. It's probably the least exciting topic in the world, unless it's your pension, of course. But if you actually look at what the government is spending its money on, and especially in the countries where the costs are getting out of control, then it absolutely is the pensions that are responsible for it. We see this in City Journal, there's great work on this, talking about state employee pensions. The numbers are often quite astronomic.
And if you look at the countries that have pension liabilities that are most problematic, if you look at Italy, if you look at Greece, if you look at France, we're talking about 14 to 15 percent of GDP already purely spent on retirement benefits. The United States, to give you a comparison, spends about 7 percent of GDP, and we're already potentially running into problems with funding Social Security.
So these are enormous amounts. These are maybe three, four times what these governments spend on like welfare for the poor, what they spend in benefits for the unemployed. Pensions really are the overwhelming budget item for these countries. And they're projected to increase substantially in the next few years, just on autopilot from people aging longer, from there being a smaller share of the population that's in working age to support these people. And so it's a real pinch, even if they keep on going as they are.
Brian Anderson: Right. Turning to the healthcare issue. A quote from Bernie Sanders on Twitter is, I think, worth commenting on. So he said, "In 2015, the United States spent almost $10,000 per person for healthcare. The Canadians, Germans, French and British spent less than half of that while guaranteeing healthcare to everyone." And he went on to say that these countries have higher life expectancy rates and lower infant mortality rates than we do.
As you've noted many time in your writing, the United States is in fact at the cutting edge in healthcare in many respects. So Americans have an array of medical options for maladies that Europeans often don't have immediate access to. And the US is a leader in medical and pharmaceutical innovation.
But Sanders isn't wrong. Right? These are actual facts that he's pointing out. So why is it that healthcare in the United States has become so comparatively expensive?
Chris Pope: Yeah, I mean I think he definitely taps into real concerns that people have that healthcare is a big budget item. It's a big unwieldy expense that people have very little control over, and so it really does feel like having healthcare, as he puts it, is an all-or-nothing thing. That you're either somebody who has health insurance, I guess he's talking about, or someone who doesn't have it, or entitlement coverage. But in reality having healthcare or not having healthcare, it's really much more of a spectrum of goods than that.
Healthcare is about a sixth of the economy, and it covers a vast array of different goods. It covers things right down from the bottom, from antibiotics, which cost cents on the dollar, or only a couple of dollars, up to cutting-edge cancer therapies that are hundreds of thousands of dollars.
And so the issue, whether you have healthcare or don't have healthcare kind of blurs over the essential point, which is which healthcare services do people have access to. That really is the much more important question, and it's the question that really determines the essence of healthcare policy, the essence of all the fiscal debates that people have in all kinds of different countries. And it's relation with life expectancy and health is kind of a complex one. Obviously the best healthcare in the world isn't going to make a sick person better off, or in better health than someone who didn't get sick in the first place, someone who is healthy.
And so we are really talking about what is really a set of expenditures to mitigate illness, which are always going to be somewhat imperfect. And unfortunately at this point, probably not enough to offset some really substantial differences that different populations have.
The United States has twice the rate of obesity than many European countries. And so we have a much higher rate of cardiovascular disease, much higher rates of cancer. And so we need a lot more healthcare to have the same outcomes as if you almost spent nothing on healthcare. We need to use a lot more healthcare, really, just to restore people to a fraction of the health that would catch up with the European level.
And so it really kind of misunderstands the nature of what healthcare spending can do and what it can achieve. In some cases it might feel like it's a magic wand. You give a course of antibiotics to people, and they're restored to health, and they go on their way. But in many cases in the most expensive healthcare services, it's not like that. Even the cutting edge cancer therapies are going to be a little bit hit or miss. They're not always going to work. Does that mean you shouldn't give them to everybody? No. But it does mean that there are going to be trade-offs involved in any decision to make available these drugs to people. And it means that there are really difficult decisions, and that there isn't always necessarily an easy yay or nay associated with it.
Brian Anderson: Sure. John Tierney, one of our contributing editors has written a lot for us on pharmaceutical prices. It's the argument he makes, and I think it's true, that the higher prices of pharmaceuticals in the US, in fact, subsidizes innovation. And that means that the rest of the world gets, in a way, to free-ride off of American ingenuity, that we've become the pharmacy to the world. US government proposals, which frequently circulate to bring down the prices of new drugs, if enacted in the wrong way, could risk discouraging some of this innovation. First of all, would you agree with that? And is this also the case with other domains of healthcare innovation?
Chris Pope: Yeah, I think the fundamental point with the United States and healthcare is that we're a substantially more affluent country than other developed countries. Our GDP's about 50 percent higher than many European countries, GDP per capita. And so the willingness to pay for medical treatment is substantially greater. And that's true just as it is for the willingness to pay for other consumer goods.
So this is true for hospital care. It's true for physician services. And it's true for prescription drugs equally. The proposals that you hear being made legislatively to cap prices for prescription drugs do tend to single out drugs for that kind of treatment. And it's a little bit strange to sort of cap our willingness to pay for drugs while letting the willingness to pay for hospital care sort of spiral up without any real limit.
It's also kind of bizarre in the sense that the drug innovation is really where most of the progress is in healthcare. And so if you're curtailing the rewards for innovation in drugs, you're actually limiting future development much more than you would if you actually were to cap prices in other parts of healthcare.
Now, I'm certainly not an advocate of price controls or rationing in other parts of healthcare. But I think you actually probably make the case that the cost of doing so for prescription drugs might even be more damaging than in other parts of healthcare just because the innovation dynamic is so fruitful on the drug side. Because even if prices are very high in the short run, after a dozen years or so, a drug goes off-patent and we get the low price, actually a much lower price anyway, in the not-too-distant future. So it's a very shortsighted place to really skimp on innovation.
Brian Anderson: Chris, you've written a report recently on what's called continuous renewable coverage, arguing that could fix what's ailing the American system of employer-provided health insurance. What is that proposal, and why in your view would it help?
Chris Pope: Well, the primary problem, I think we can understand by casting our mind back to the Affordable Care Act and the Obamacare debate. It was this issue of preexisting conditions that came up, and what the Obama administration did with that legislation, and Congress did with that legislation, was really to say that insurers had to cover people with preexisting conditions at the same price, for the same premiums, as people who did not have preexisting conditions. Basically you'd have to cover them on the same terms.
The problem with this was that it basically said that an insurer has to cover someone who's already sick at the same price as someone who signs up before they get sick, which created a gigantic incentive for people to drop coverage, wait till they get sick, and then buy health insurance. Which meant the insurers were stuck with a bunch of people who were basically far more sick on average than the population as a whole, had much higher average healthcare costs than the population as a whole. As a result of this, healthcare costs doubled within four years after the implementation of the Affordable Care Act.
The solution that I propose to that problem, as a way of avoiding the spiraling premium problem, but also as a way of ensuring that people don't suffer the preexisting condition problem, is to give people a discount if they sign up before they get sick, so that they're rewarded for maintaining continuous coverage, are able to get a price that's basically in fair proportion of their healthcare risk so that they're not penalized for doing the prudent thing in signing up early. And secondarily, providing a reward for them keeping continuous coverage, hence the name, which prevents the problem of preexisting conditions from emerging in the first place.
The problem of preexisting condition is essentially associated with gaps in coverage. The problem of preexisting condition is one where if you're not insured, you develop a major chronic illness, and then you apply for insurance for the first time, and then you're denied it. If a person maintains continuous insurance coverage, it prevents the problem with preexisting conditions from ever emerging, which is really a full solution to the problem rather than a bad kind of jury-rigged solution that has all kinds of terrible side effects as the Affordable Care Act approach did.
Brian Anderson: What do you think the political prospects of such a measure would be?
Chris Pope: So I actually think they're reasonably good for the reason that it ultimately advances things that both Democrats and Republicans are fairly enthusiastic about, or would be fairly enthusiastic about, which is reducing the amount of people with preexisting conditions, making healthcare more affordable to people who are currently uninsured. And it would reduce some of the bad incentives in the healthcare market.
I see it as a fairly technical solution to a lot of the market dysfunctions that we see currently. I think it would need to be packaged probably with a restructuring of the subsidies that are currently in the Affordable Care Act. That would be a little bit more complicated. But I think conceptually that there's no reason why it couldn't be part of a bipartisan package. I think what makes me a little bit more optimistic about this is that we're finally a little bit past all the Obamacare wars, which lasted for about 10 years, where anything to do with the Affordable Care Act, Republicans would oppose it—a sort of knee-jerk opposition just because it was anywhere associated with anything favorable to do with the legislation. And Democrats would have knee-jerk opposition to anything that they saw as in any way opposed to the legislation.
I think we kind of moved past that a little bit. And so there is probably more scope for pragmatic and technical tinkering that can sort of get rid of some of the dysfunctions in the regulations.
Brian Anderson: I'd like you to put on your political science hat for a moment. I'd like to get your thoughts about the Biden administration's legislative priorities so far. It did manage to pass an infrastructure package, but its more transformative policies to enact federal childcare, expand the child tax credit, all of the environmental, renewable energy stuff, all of that has faltered so far. The president is trying to rebrand some of those proposals, so he's basically dropped the Build Back Better theme. But it's not clear at the moment that project or that effort will go anywhere.
So why in your view has the president run into such difficulties in enacting his broader agenda? And in political economy terms, what does all of this new spending tell us about the composition and priorities of the Democratic Party in 2022?
Chris Pope: Well, I think I sort of agree with Larry Summers because in March 2021, last year, the American Rescue Plan Act, which spent $1.9 trillion was so expansive and so indiscriminate in its spending, and so thoughtless in many ways, crowded out the political appetite, and the macroeconomic room for spending and deeper, more thoughtful reforms, more targeted reforms to potentially be done this year. Summers made the argument, I think quite presciently, that there really wouldn't be any money left, that you would have a problem with inflation if they did that.
That's exactly what happened. So a big part of that legislation was a big stimulus that gave everybody thousands of dollars of checks with no real deliberate public purpose other than to juice up aggregate demand. And it succeeded in juicing up aggregate demand, which increased inflation. So there was really a lack of thoughtfulness, a lack of prioritization. I think it reflects the nature of the Democratic Party in 2020 during the primary. I think there was an unwillingness to prioritize. The only thing that was seemingly learned about the Obama administration was that the stimulus had been too small and that you could have had better economic growth if you simply spent larger amounts of money. And that that would necessarily generate prosperity, which in retrospect was exactly the wrong lesson to be drawn from that.
What's happened is they spent an enormous amount of money with the American Rescue Plan Act, which drove up inflation and kind of crowded out the rest of the domestic policy agenda. And now people like Manchin and Sinema, and probably a lot more members of Congress, are quietly very much opposed to that. And voters are now almost at a pitchforks moment with inflation. They're looking at their paychecks and they're realizing that even if they weren't directly asked to pay for this through taxes, that they were actually the people who were paying for the last year's legislation through inflation, and that it's been taken out of their pockets otherwise.
Brian Anderson: Thanks very much, Chris. Don't forget to check out Chris Pope's work. It's on the City Journal website. Link to his author page in the description. You can find City Journal on Twitter @cityjournal and on Instagram at @cityjournal_MI. Chris Pope is on Twitter @CPopeHC. And as always, if you like what you've heard on today's podcast, please give us a nice ratings on iTunes. Chris Pope, thanks very much for coming on the show.
Chris Pope: Thanks, Brian.
Photo: Douglas Rissing/iStock