Obama’s speech for health reform: some economic and normative comments

[The transcript of the speech is available  here]

[A longer version of this post is available here]

Obama’s speech about health reform in the Congress last Thursday is structured on three main points:

– The necessity of carrying out a reform in the health system. Arguments concerning risk aversion or market failures are invoked to defend the pertinence of the reform.

– The three objectives addressed by the plan:

1. achieving a greater stability and security to those who have health insurance,
2. reaching universal coverage and
3. controlling (and reducing) costs and improve quality of the service.

–   The necessity of achieving the “financial independence” of the reform: the reform should be able to finance itself almost entirely through savings over the existing system

I have chosen three concrete questions to be developed: the idea of the “public option” in the health reform, the political consensus and the normative issues behind the health debate.

The public option

In the speech, the public option is conceived as a mean and not an end in itself. Indeed, it is defended as a possibility for reaching two of the above-mentioned goals: the universal coverage and the reduction in costs and improvement on quality through the introduction of competition in markets where there is only a private company with an important market power. In this sense, one could interpret Obama’s concern with the promotion of competition as a way to lower costs as an implicit support for the thesis of the lack of competition as one of the main causes of the increase in health expenses experienced during the last decades in the US.

Political consensus

One of the strongest Obama’s efforts in the pursuit of political consensus is the invocation of the American spirit in the final part of the speech. Obama tries to base the very basic moral intuition behind the health care institutions in a –supposedly- commonly shared American spirit. Unfortunately, I think that Obama’s examples refer to a very specific historic moment in which there was a broad consensus among parties about the principles which should guide the American society. I think it is no longer the case.

In the book The conscience of a liberal, Paul Krugman explains how the Democrat and the Republican party shared a great part of the basic ideas during the period between 1945 and 1960. Unfortunately for the theory of the “American spirit”, Krugman explains that, after Nixon’s presidency, there was a process of differentiation between parties. As an example of this, in the 60’s and the first pasr of the 70’s Americans were almost equally divided when facing the question about the existence of significant differences between parties. In 2004, 76% of the US citizens found significant differences between them (46% in 1972). Therefore, it seems more and more difficult to defend the health care reform on an ecumenical basis.

The normative questions of the health debate

Obama, quoting to Edward Kennedy, states that: “What we face (…) is above all a moral issue; at stake are not just the details of policy, but fundamental principles of social justice and the character of our country”. Unfortunately, he does not go further in making those principles more explicit (probably because a speech in the congress is not the best place for going into complicated philosophical debates).

Can we be less ambitious? Obama seems to look for some consequentialist arguments to justify the reform. One way to do this is by pointing out the welfare improvement resulting from the elimination of risk derived from universal insurance. Note that one implicit assumption here is that the implementation of the universal coverage won’t need any extra dollar to be collected through distortionary instruments like taxes.

Another consequentalist argument comes from the fact of considering that –using Musgrave’s arguments for public intervention- health service is a merit good. Merit goods refer to a commodity that has to be provided independently of some individual judgments or willingness to pay. This argument involves a certain paternalistic view of the State as well as some assumptions pointing to a certain degree of myopia on the consumer’s side.

This way of reasoning is not entirely satisfactory. Indeed, the consequentialist approach is often based in problems that arise because a minimum health coverage is available to everyone.  Which is, then, the justification for this? As we pointed out before, the “principles of social justice” in this point are not specified in the speech.

Fortunately, the economist’s tool kit includes an extremely prudent normative instrument when judging a measure: the Pareto-optimality criteria. A situation is said to be Pareto optimal when it is impossible to improve the situation of a given individual (or individuals) without worsening the situation of at least one of the remaining members in the society. In some parts of the speech it is said that “if you are among the hundreds of millions of Americans who already have health insurance (…), nothing in this plan will require you or your employer to change the coverage or the doctor you have”. Once again, the normative issue uses the implicit hypothesis of “financial independence”. If savings or elimination of waste and fraud did not materialize, the necessary creation of new taxes or debt to finance the $900 billion cost (over ten years) could provoke some welfare losses which would eliminate the Pareto optimality of the reform. Our normative criteria is, thus, certainly fragile.

Some conclusions

Our comment has shown how the economic questions are embedded in a much more general and complex frame involving political and normative issues. The “technical economist” is encouraged to work on questions like the role of competition in lowering costs or the optimal way to finance the reform. His or her task is certainly challenging and valuable. The “brave economist” is invited to, in addition to the previous tasks, go into the normative world as the only way to fully understand the complex reality characterizing the frame in which the economist is working. The challenge has been issued.