The US spends an unbelievable 17.9% of its GDP on health care, with worse health outcomes than many other countries and 50 million uninsured. The problem largely lies in the way health care is consumed and provided. Shockingly for something so integral to our wellbeing and happiness, consumers are not the primary purchasers of their own health care. Because employers can deduct the health benefits they provide from their taxes, it makes more economic sense for health care to be employer provided. Not only are consumers not the purchasers of their health care, but they suffer a double whammy when they lose their job as they also lose their health insurance coverage.

The reason health care is employer provided is because of a historical accident. Employers lobbied to get health care expenses to be tax deductible during World War II to compete for labor on benefits offered rather than on wages which they were barred from doing because of wage controls. While the wage controls were lifted the tax deductibility of health care expenses remained leading to the structure we see today.

Moreover, the current system looks more like prepaid health purchases than actual insurance. Instead of coming to play only in the case of catastrophes (e.g., getting cancer or a debilitating disease while you are young), every medical procedure is covered with very low copays. Home insurance by comparison is “real” insurance. You are covered in the case of floods, fires, tornadoes, etc. If home insurance was structured like health insurance you would pay extremely high premiums, but in exchange all the maintenance plus all the modifications and improvements would be covered by the insurance – it would be a prepaid construction and maintenance plan with an insurance component. On top of that because consumers are not directly bearing the cost of their insurance, politicians and insurance providers have a real incentive to include more and more services in the “basic” health insurance plan.

Recent studies suggest that we could provide better health outcomes for as little as 10% of the current average monthly cost with a mandatory, individually purchased health insurance plan that focuses on preventative care and catastrophic insurance, with high deductibles for everything else, and better guidelines for appropriate end of life care. Currently, end of life care consumes 40% of all health care expenditures and provides less than a 6-month increase in life expectancy, while often causing patients greater distress!

To give a sense of scale Walmart’s health care plan, which has number of those characteristics costs $30 per month for non-smoking singles and $100 for non-smoking families. Should we have mandatory individual purchases of these plans, the costs would be lower as the costs of providing healthcare to the uninsured would be significantly decreased.

While purchasing a basic health insurance plans would be mandatory, the same way it is mandatory to have a driver’s license to drive a car, the government would make full or partial payments on a means tested basis for those who cannot afford the plan.

Increasing competition between schools, raising standards and reforming school funding

There is a huge disparity in the K-12 education outcomes between schools in the US and between countries around the world. Fortunately there has been enough experimentation both in the US at a state level and with charter schools and at the international level for best practices to emerge.

Funding schools through local property taxes is particularly perverse as it entrenches inequality as good neighborhoods get good schools and bad neighborhoods get bad schools. To create opportunity of equality the system would have the following characteristics:

• School choice such that parents and kids can apply to a large number of school and for schools to compete for the best students

• Shorter summer vacations – the current vacation schedule is a legacy of our agrarian past where parents needed the kids to toil the fields

• Longer school days

• Comprehensive difficult exams on a wide variety of topics making it hard to “teach the test” and create a more well-rounded population

Parents should bear the costs of educating their children directly with partial or full payments by the state on a means tested basis for those who cannot afford to pay.

Interestingly enough, reducing class and school size, which was hailed as the solution to the quality of education problem, proved counterproductive. Reducing the class size from 30 to 15 only doubled per pupil teacher expenses without impacting outcomes. Worse, reducing school size actually decreased quality because the schools no longer had the scale to offer more specialized or esoteric classes or segment classes by ability.

Means testing all benefits

It makes no sense for the wealthy to be receiving public pensions, unemployment insurance, etc. Moreover, many benefits that seem like good ideas like “offer free college education to everyone” are actually disguised subsidies for the rich. It is the children of the rich who are disproportionately likely to go to college. To the extent the state wants to provide benefits to those going to college, it makes more sense to offer them on a sliding scale basis based on wealth and income. The state would make the full payment for those who can’t afford it and partial payments on a declining level as income and wealth rises.

In most OECD countries, the state is doing too much for the middle class and not enough for the needy. Instead of focusing on helping the needy, it has taken money from the left pocket of the middle class in the form of taxes and provided it back in the form of services to the right pocket usually in the form of “free” health care, “free” education and many other “free” public services. Given that the exact services are not those that every individual would have bought for themselves it’s much less efficient than just letting most people be consumers of the exact mix of services they want to purchase.

Means testing benefits also has the benefit that it provides political cover for the structural reform to the benefit programs.

Eliminate all tariffs and trade barriers

As Ricardo demonstrated two hundred years ago, even if one country has an absolute production advantage in the production of all goods, it will still make sense for countries to specialize to focus on their comparative advantage.

Shielding industries from competition through tariffs or non-tariff barriers to trade is ultimately futile as the protected industries almost never gain competitiveness. It just distorts domestic resource allocation and increases costs to consumers of whatever industry is being protected.

There are more efficient ways to help the workers being affected by international trade. The gains from trade are always greater than the losses incurred even though the winners and losers are different individuals, but it’s possible to compensate the losers. For instance US steel tariffs were estimated to cost over $500,000 per job saved. It would have been much cheaper to retrain these workers and even compensate them for any loss of compensation that might occurred should they be forced to take lower paying jobs.

Moreover, there is something profoundly unfair about depriving poor countries of their comparative advantage. Farm subsidies and tariffs for instance increase the cost of food in the US and Europe, enrich a small number of agri-businesses and deprive farmers in Africa and South America of their livelihood!

Eliminating all subsidies beyond societal transfers to help those in need

The aforementioned recommendations have no implied value judgments on equity; they just aspire to make the rendition of government services as efficient as possible. This can be done whether the state choses to be highly redistributive like in the Nordic countries – implying higher tax rates and more generous contributions to the benefits programs mentioned above – or less redistributive like the US currently is. Beyond direct transfers to the needy to serve societal objectives, there is a real opportunity to eliminate various distorting subsidies. As mentioned in the tax reform section, politicians are incapable of selecting winning technologies. Moreover, subsidies to industries or companies distort the allocation of capital.

It boggles the mind that the EU spends 60 billion euros a year, almost 50% of its budget on farm subsidies! Even the US spends $40 billion a year in farm subsidies, 35% of which are for corn. Corn ethanol is an example of the ridiculousness of those subsidies. Corn ethanol which was billed as an environmentally friendly alternative to gas is anything but. On top of that using corn to make ethanol decreases its availability and increases its costs in the food supply chain. We would be much better off importing the environmentally friendly sugar cane ethanol made in Brazil.

In total the US Federal Government spends almost $100 billion corporate subsidies excluding the subsidies implied in all the corporate tax credits and discounts!

Conclusion

These reforms may still be politically unpalatable, but in a few years the fiscal position of the US will be untenable and reform will be inevitable. Let’s hope we start improving before the bond market forces us to!