What do Social Security, Medicare and public investments have in common? They make us richer

Yesterday, David Brooks channeled a deeply flawed presentation by the Third Way to argue that while the federal government used to spend money on things that improved national “dynamism” it now just spends on “entitlements.”

A word of (very) muted praise for Brooks—he does lament that too much spending goes on tax loopholes, and he’s largely right there.

But, he spends most of his time, and, Third Way spends all their time, arguing that there is something deeply damaging about the fact that federal spending on Social Security, Medicare, and Medicaid is now a bigger part of the budget than public investments. There’s little economic basis for this angst.

You’d have to look hard to find a bigger fan of public investments than me. But, the economic benefits of Social Security, Medicare, and Medicaid are absolutely enormous. They provide a service (insurance against risk, and people value insurance quite highly) much more efficiently than do private-sector providers. In the case of Social Security, this efficiency is mainly in low administrative costs and the government’s ability to provide actuarially fair insurance without needing the compensation that private-sector insurance providers would demand.

For the health programs, these benefits are supplemented by the federal government’s demonstrated success in containing health costs more effectively than private providers. To take just the most obvious example, since 1979, Medicare costs per beneficiary have grown cumulatively 40 percent more slowly than equivalent benefits provided by private insurers. To make this concrete, the average family insurance plan provided by employers today costs $15,000. If the private sector had managed to constrain costs as effectively as Medicare over this time, it would only cost $9,100—giving workers with family health insurance plans a potential boost to wages of just under $6,000.

Remind me again why I’m supposed to be dismayed about the federal government providing insurance much more efficiently than the private sector?

It’s true that the rising cost of health care has made the social insurance programs soak up an ever-larger portion of the budget, but this is because our private health system has failed to constrain these costs. Medicare (which provides public finance for purchasing health services from private-sector providers) has been able to blunt this failure better than private insurance, but this health care inflation is indeed a problem, just not the one Brooks and Third Way think, and the solution isn’t to shrink the footprint of public financing of health care costs, it’s to expand it.

Lastly, there just isn’t any persuasive evidence, even on the raw political point they (implicitly) make: That there is some implicit global cap on federal spending that voters will enforce, and so each dollar spent on Social Security, Medicare, and Medicaid necessarily cannibalizes public investments. There’s evidence on this question, and it doesn’t support the claim that these priorities necessarily trade off. In short, the really salient choice isn’t between social insurance versus public investments—as Brooks and Third Way would have it—it’s really between those who believe the substantial evidence showing that a mixed economy (one where governments weigh in when they can do something more efficiently or set rules that rule out socially-destructive behavior) can make us richer and those who don’t. And there’s no reason why we can’t have both well-run social insurance and public investments.


  • The_Monk

    Have you considered the cost-shift that providers typically engage by off-loading part of the cost of lower reimbursements paid to providers via Medicare and Medicaid to privately insured accounts? Which means that while Medicare/Medicaid costs remain low, they do so partly because providers are shifting the losses for covering such patients to billing to private insurers. Or is that an issue at all?